Value-added tax (VAT) is something we are all aware of but do we understand how the process really works? This article unpacks VAT and the processes required to help ensure compliance for small business owners.

What is VAT?

VAT is a consumption tax that is put on a product at each stage that value is added in the supply chain (from production to sale). As unpacked by Investopedia, “the amount of VAT that the user pays is on the cost of the product less any of the costs of materials used in the product that have already been taxed.”

When is VAT applicable to you as a business owner?

In South Africa the VAT threshold sits at a turnover of R1 million across any 12 consecutive months.

How does VAT work?

Ultimately it is the consumer who pays the VAT and it is the suppliers in the supply chain who ensure that the government receives the VAT that is due. Otherwise worded, “for every item bought the consumer pays VAT and the buyers earlier in the chain of production receive reimbursements for previous VAT taxes paid.”

Once you have completed VAT registration there are duties that must be completed by the business. As per the SARS website these include ensuring that the following is in place:

  • Include VAT in all prices advertised or quoted
  • Charge and collect VAT
  • Submit returns and payments on time
  • Issue tax invoices for supplies made
  • Maintain adequate records for supplies made and received

VAT payments under Category A are due every two calendar months. Payments that are made electronically via eFiling are due no later than the last business day of the month after the end of the tax period.

If your business is nearing the VAT threshold it is strongly advisable to engage with a registered tax practitioner to discuss getting your business VAT registered.