VAT hike requires system changes

ACCOUNTING: SYSTEMS HAVE TO BE CHANGED ‘If a company keeps its price the same as before the April 1 increase, it cannot charge additional VAT from clients at a later stage.’

Tax and law firms have been highlighting some practical implications which companies will have to take into account during the change in the value-added tax (VAT) rate from 14% to 15%. In terms of system management, many companies will initially have to be able to accommodate two VAT rates. One invoice may even reflect a rate of 14% and 15% depending on when the goods were supplied or services delivered.

Deloitte’s Severus Smuts says companies will have to be ready to comply with the rules.

Companies have the choice not to increase their prices to account for the increased VAT. The result is simply less income from the same price because of the higher tax fraction to Sars.

“Once a company has decided to keep its price the same as before the April 1 increase, it cannot charge the additional VAT from clients at a later stage.”

Smuts says the VAT rate on a contract signed at the beginning of 2018 may be increased after April 1 to account for the increase.

Webber Wentzel’s Des Kruger says a tax invoice that doesn’t reflect the 15% rate may be invalid. If the requirements of a valid tax invoice haven’t been met, the recipient of the invoice may be unable to claim any input tax relief.

He says several businesses have indicated they’ll have to absorb the increase until they’ve been able to change their systems. If a business absorbs the VAT increase, it would still need to issue a tax invoice at 15%.

“On a strict interpretation of the law, the recipient of the supply [client or customer] could then rely on that tax invoice to claim input tax relief at a rate of 15%.”

Kruger says there may be cash flow implications for a business if it absorbs the increase. He believes the business will be able to claim the amount (difference between the higher tax, but same price) as an income deduction. This allows the company to claim a deduction for expenses incurred in the production of income. But his view isn’t shared by everybody.

Smuts, vice-chair of the VAT work group at the SA Institute of Tax Professionals, doesn’t see this as an option.

Companies that absorb the increase will have less income. They may decide to absorb the tax cost to maintain business, or even to grow their business, but they’ll have to account for the increase from April 1 when it becomes effective.

Smuts says the complexities around the change will differ from company to company. It’ll have a major impact on banks because of the different systems they must run and industries with a large customer base such as in telecoms.

“There will be period where companies will have to keep account of the two rates because of debit and credit notes issued following the first transaction – whether it was 14% or 15%.”