VAT audit/review considerations

VAT audit/review considerations

Content of the session Selection for an audit What can you expect and what are your rights? Risk areas Input VAT Risk areas Output VAT 2

SARS audit/review The following are the areas / aspects flagged by SARS Complex adjustments, e.g. change in use adjustments Input VAT claimed on bad debt Increase in input VAT Decrease in / variance of output VAT Refund position Late submission, other non-compliance 3

SARS audit/review Example SARS notification of verification "...in terms of the Tax Administration Act, your VAT201 declaration has been identified for verification as a result of xxx (e.g. a significant increase in input VAT) in the submission on xxx. Please review your VAT201 declaration against your relevant Value-Added Tax (VAT) calculations and relevant material. If you find any errors, submit a request for correction to correct them. If no errors are identified, you are required to submit the following supporting documentation and material: Output tax schedule, Input tax schedule, All documents relating to capital expenditure claimed (if applicable), and Other transactional documents that would for example, substantiate any increase/decrease in sales, inventory, change in use adjustment or bad debts. 4

Documentation / Process Authorisation letter The taxpayer is entitled to peruse the letter authorising the audit / review / investigation Notification letter Prior notice of at least 10 business days (taxpayer can request variance of 5 business days) Stage of audit A taxpayer is entitled to be informed of the stage the audit is at every 90 days Documents still outstanding Current scope of the audit Stage of completion Letter of audit findings Within 21 business days of the audit being finished to indicate and explain If the audit is inconclusive; or If a material adjustment is required Taxpayer has 21 business days to respond SARS is exempt from these requirements if it is reasonable and justifiable and will prejudice the outcome or progress of the audit 5

Your rights and responsibilities You are entitled to receive: Documentation (letter of authorisation, completion, letter of findings, etc) stage of Proper reasons and basis for selection (random or riskbased) Explanation of why the enquiry is relevant You must Cooperate (if not, criminal offence!) Give SARS access to your property and records Prepare employees provide evidence under oath 6

Understatement penalty % Behaviour Standard Case If obstructive, or if it is a 'repeat case Voluntary disclosure after notification of audit or investigation Voluntary disclosure before notification of audit or investigation Substantial understatement 10% 20% 5% 0% Reasonable care not taken in completion of return 25% 50% 15% 0% No reasonable grounds for tax position taken Impermissible avoidance arrangement 50% 75% 25% 0% 75% 100% 35% 0% Gross negligence 100% 125% 50% 5% Intentional tax evasion 150% 200% 75% 10% * Subject to an objection and appeal process

Risk areas

Input VAT General risks Overall risk Overstatement Timing claiming too early Not claiming based on valid VAT invoices received (cannot claim, unless alternative documentation is available) Claiming at the wrong rate (e.g. adjustments to be made at 14% instead of 15%) 9

Specific examples Apportionment ratio Imports Denied supply items Not used when should Incorrectly applied An alternative basis without permission Timing: Only claim once SARS is paid VAT claimed on entertainment and motor cars 10

Valid VAT invoices

VAT invoices requirements FULL (> R5 000) ABRIDGED ( R5 000) Heading Tax Invoice, VAT invoice or Invoice Supplier s name, address and VAT registration number Recipient s name, address and VAT registration number Unique serial number Date Description of goods / services Quantity or volume of the goods or services Value of the supply, the amount of the tax charged and the consideration; OR Statement that 14% VAT is included in the consideration Heading Tax Invoice, VAT invoice or Invoice Supplier s name, address and VAT registration number N/A Unique serial number Date Description of goods / services N/A Value of the supply, the amount of the tax charged and the consideration; OR Statement that 14% VAT is included in the consideration 12

Alternative documentation BGR36 If reasonable attempts were made to obtain the documentary proof Circumstances beyond the vendor s control Supplier failed to respond after being contacted Supplier s place of business has suffered severe damage, e.g. a natural disaster Supplier has been deregistered as a vendor Supplier fails to issue a valid VAT invoice, debit note or credit note No other provision in the Act provides for a claim of input 13

Issue of debit / credit notes Section 21 Can only be issued to rectify the VAT amount incorrectly charged if: The nature of the supply is altered Consideration of the supply is altered Goods / Services have been returned Supply is cancelled Error was made when invoicing occurred (e.g. pricing error) 14

Denied supplies

Entertainment What is Entertainment as defined? Provision of food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind by a vendor whether directly or indirectly to anyone in connection with an enterprise carried on by him. Impact No input, no output 16

Entertainment: Exceptions Exceptions: Vendors in the entertainment industry All direct and indirect costs covered OR Charge = open market value OR Claim input Entertainment to clients for bona fide promotion purposes and in all respects similar to entertainment that s supplied regularly by the vendor OR Goods / services acquired for purposes of making taxable supplies for provision of any food to clients which were not consumed by the clients and are then subsequently supplied to any employee or welfare organization 17

Entertainment: Exceptions Exceptions: Meals, refreshments or accommodation to employees, office holders or self-employed natural persons who had to spend at least one night away from their usual place of residence Can claim input tax credits 18

Entertainment: Exceptions Exceptions: Vendors who organise seminars Meals and refreshments in a medical care facility to employees, as long as they are incidental to the admission into the medical care facility and the costs are not separately charged. Hospital: Charge per night includes meals Charge per night is only for accommodation, meals are charged separately Meals or refreshments supplied by vendors as operators of ships or vessels to any crew members Entertainment acquired for the purposes of awarding that entertainment as a prize for bets 19

Motor car Definition: A Motor, station wagon, minibus, double cab light delivery vehicle and any other motor vehicle of a kind normally used on public roads, which has three or more wheels and is constructed or converted wholly or mainly for the carriage of passengers. Only denied in terms of ACQUISITION Repairs? Rental, AVIS? 20

Motor car: Exceptions Specifically excluded from the definition: Game viewing vehicles 7 or more passengers Exclusively used for game viewing in national parks, game reserves, sanctuaries or safari areas Hearses Exclusively used for transporting deceased persons Vehicles capable of transporting only one person or suitable for carrying more than sixteen persons Vehicles with an unladen mass of 3 500 kilogrammes or more; Caravans; and Ambulances Motor car dealers Motor cars given as prizes (bets) 21

RTCC v C:SARS case 22

Imports

Imports VAT payable on import of ALL goods Importer Responsible for payment of VAT Irrelevant whether importer is registered for VAT or not WHY??? Time of supply BLSN When the goods physically enter SA Other When the goods are cleared by Customs (date on customs invoice) 24

Importation of goods Custom union countries (BLSN) Customs duty value + Non-refundable import duties and other taxes x 15% Other countries Customs duty value + 10% of Customs duty value + Non-refundable import duties and other taxes x 15% 25

Import of goods Import goods at a cost of R100 and a customs duty value of R180. Pay import duties of R20 Botswana R180 + R0 R180 x 15% = R27 26 New York R180 + R18 + R20 R218 x 15% = R32,70

When can VAT be claimed If the goods are used for taxable purposes (normal rules) Timing: Once SARS has received the VAT on the import Problem: Vendor has a two month VAT cycle ending on 31 August. Pays VAT on the import of goods to a clearing agent on 17 August. The clearing agent has delayed payment terms with SARS and only pays SARS on: 20 September 2 October Therefore, rule is that VAT can be claimed back if SARS has received the VAT on the import by the time of submission of the return 27

Apportionment of VAT

Allocation of input VAT 29

Allocation of input tax credits A bank makes both taxable supplies (cheque books, bank charges) and non-taxable supplies (issue of loans) Purchase a printer that will be used by the home loan advisor Purchase a printer that will be used by the cheque department Purchase a printer that will be used in the general information counter 30

Allocation of input tax credits Input-based method: VAT on supplies that are wholly attributable to taxable supplies Total VAT Turnover-based method : Total value of taxable supplies (excl VAT) Total value of all supplies (excl VAT) 31

Allocation of input What amounts must be used? What happens if I haven t traded in the PY? What if the CY position is different to the PY position? Different methods available? 32

95% rule 95% or more supplies = taxable supplies No apportionment, claim 100% input 33

SARS vs. British Airways Elements of passenger ticket of international flight Charge levied by Airport Company Ltd (baggage handling, waiting lounges, etc) BA zero-rated the whole fare SARS: Section 8(15) Argued BA fare was a composite fare for a single supply of a number of services Split components out and apply standard rated VAT to Airport Company fee Supreme Court of Appeal Total fare is zero-rated Section 8(15) can only be applied when the same vendor supplies more than one service which had been supplied separately 34

Output VAT

Output VAT General risks Overall risk Understatement Levying at the wrong rate (e.g. zero-rating supplies without meeting the requirements, invoiced at 14% and vendor is out-of-pocket if SARS requires a 15% payment) Not identifying all supplies (especially deemed supplies) Incorrect classification, e.g. ICA vs. rental agreement Netting off of income and expenses 36

Specific examples Import of goods and services Export of goods and services Not all taxable supplies identified Debit and credit notes Use of agent and principal Output not accounted for on import of services Direct vs. indirect exports Only zero-rate if supporting documentation is in place Overpayment received: Output not raised within 4 months Fringe benefits Indemnity payments received from insurers Prepayments received Issue not allowed per the VAT Act Principal ultimately responsible 37

VAT on the import of a service

Importation of services VAT is payable only when: Imported by non-registered vendor OR Not used to make taxable supplies Supply by a non-resident to a person resident within the Republic Services used within the Republic What if the service is delivered and received by the same person? No input VAT if: It is a supply of services that would have been a zero-rated supply if it had been rendered in SA; or The supply of educational services by a foreign educational institution to SA students; or The supply of services by an employee or director to an employer. 39

Exports

Basics Direct exports Supplying vendor delivers or consigns movable goods to a recipient at an address in an export country OR The services of a cartage contractor is obtained to deliver the goods on behalf of the seller to a recipient at an address in an export country Seller controls the export Zero-rated if documentary evidence is available Interpretation Note 31 Supplier s copy of the zero-rated tax invoice Recipient s order / contract Transport documentation Export documentation (as per Customs and Excise Act) Proof of payment Proof of payment of transport costs (if cartage contractor was made use of) 41

Timing Exported within 90 days from earlier of: Issue of invoice; or Receipt of any payment Exceptions: Export to be made within 30 days Movable goods for which an advance payment is required 30 days Supply of precious metals which are exported via air 30 days Movable goods subject to a process of repair, improvement, erection, manufacture, assembly or alteration 90 days Supply of hunted animal that is subject to a process of preservation or mounting as a trophy 7 months Supply of tank containers which are to be used for the carriage of bulk liquid, powders or gases 6 months Extension is possible VATRulings@sars.gov.za requesting extension before the expiry of the allowed period 42

Indirect export Buyer is responsible for transport Normal rule: VAT is actually levied by the vendor, can be claimed back by the buyer Sells SA Vendor Party in SA Address in export country Transports 43

New Export Regulations - Background Supplies on/after 2 May 2014 ELECTION made that transaction is zero-rated Export has to take place within 90 days from the earlier of: Date of invoice; or Receipt of any payment Documentary proof to be supplied within 90 days from the date that the goods are required to be exported If not, VAT should be levied @ 15% Buyer can claim the VAT back within 5 years, provided that the documents can be supplied 44

New Export Regulations Part 2A Supplier Harbour Airport Pipeline Electrical transmission line Purchaser at address in export country 45

New Export Regulations Part 2A Vendor SA Recipient Foreign Recipient Ownership vests in 1 st recipient (SA) for a moment before sold to a 2 nd recipient (foreign) 46

New Export Regulations Part 2A Vendor SA Vendor (repair, improvement, assembly, alteration) Harbour Airport Purchaser 47

New Export Regulations Part 2B Export per road / rail Therefore, export to African country 1. Collects goods SA vendor 3. Exported Agent (appointed by purchaser) Purchaser 2. Stores goods in warehouse 48

Deemed supplies

Fringe benefits Time of supply Time when the benefit becomes subject to employees tax Value of supply Fringe benefit value, except right of use of a motor vehicle Remember exempt supplies 50

Examples Cash allowances? Long service awards cash? Long service awards assets? Holiday accommodation? Low interest rate loan? Share incentive scheme? Pension fund and medical aid contributions? Bursary scheme? Supply of a motor vehicle at less than market value? 51

Use of motor vehicle Determined value is ALWAYS excluding VAT, even if input VAT was denied 15% diminishing value If input tax deduction was denied 0,3% If input tax was not denied 0,6% Employee bears FULL maintenance costs R85 per month deduction Employee pays a consideration for the right of use Deduction if Consideration is to cover fixed costs and maintenance MONTHLY!!! TAX FRACTION!!! Apportion for taxable use 52

Example Spices-R-Us is a registered VAT vendor. The CEO of Spices-R-Us, Mr. Pepper felt that he deserved to drive a luxury vehicle after his recent promotion as CEO. Therefore, Spices-R-Us decided to buy a BMW 325 for Mr. Pepper. Spices-R-Us bought the BMW from Alberante BMW and paid R287 500 for the vehicle. Mr. Pepper will be responsible for all costs relating to the maintenance and repair of the vehicle. 53

Solution Determined value = R287 500 x 100/115 = R250 000 Motor vehicle as defined Therefore, input tax deduction was denied Therefore, 0,3% R250 000 x 0,3% = R750 Deduction of R85 p.m. = R750 R85 = R665 x 2 months (assumption) = R1 330 x 15/115 = R173,48 output VAT (during that VAT period) x % taxable supplies 54

Indemnity payments Who should receive the consideration? In terms of an insurance contract receives consideration for a loss incurred in the ordinary course of carrying on an enterprise Deemed consideration received for services performed Timing of the supply : When the payment is received by the a loss insured / the 3 rd party suffering Not applicable when: Supply of services contemplated by the insurance contract are not taxable supplies; OR Total reinstatement of stolen goods or goods damaged beyond economic repair and an input tax deduction was denied What if an asset is replaced in stead of cash received? 55

Example A building generating 80% commercial rental income and 20% residential rental income, is destroyed in a fire. The insurer pays an amount of R100 000 000. 56

Excess payment Output VAT payable if excess is not refunded within 4 months If refunded later? Consider the following example: VAT vendor X has an outstanding balance of R500 owing to one of its creditors (also a VAT vendor). If VAT vendor X pays R800 towards this account, what will the VAT implications be? On the date of payment? If not refunded 4 months after the date of payment? If refunded 6 months after the date of payment? 57

ICA vs. Rental agreement

Instalment credit agreement instalment credit agreement means any agreement entered into on or after the commencement date whereby any goods consisting of corporeal movable goods or of any machinery or plant, whether movable or immovable (a) are supplied under a sale under which (i) the goods are sold by the seller to the purchaser against payment by the purchaser to the seller of a stated or determinable sum of money at a stated or determinable future date or in whole or in part in instalments over a period in the future; and (ii) such sum of money includes finance charges stipulated in the agreement of sale; and (iii) the aggregate of the amounts payable by the purchaser to the seller under such agreement exceeds the cash value of the supply; and (iv) (aa) the purchaser does not become the owner of those goods merely by virtue of the delivery to or the use, possession or enjoyment by him thereof; or (bb) the seller is entitled to the return of those goods if the purchaser fails to comply with any term of that agreement; or 59

ICA (continued) (b) are supplied under a lease under which (i) the rent consists of a stated or determinable sum of money payable at a stated or determinable future date or periodically in whole or in part in instalments over a period in the future; and (ii) such sum of money includes finance charges stipulated in the lease; and (iii) the aggregate of the amounts payable under such lease by the lessee to the lessor for the period of such lease (disregarding the right of any party thereto to terminate the lease before the end of such period) and any residual value of the leased goods on termination of the lease, as stipulated in the lease, exceeds the cash value of the supply; and (iv) the lessee is entitled to the possession, use or enjoyment of those goods for a period of at least 12 months; and (v) the lessee accepts the full risk of destruction or loss of, or other disadvantage to, those goods and assumes all obligations of whatever nature arising in connection with the insurance, maintenance and repair of those goods while the agreement remains in force; 60

Example On 1 January 2009 Africa Bank Ltd entered into a finance lease with Production (Pty) Ltd for the lease of a motor vehicle as defined. The vehicle was delivered and brought into use on that date. The agreement stipulates that 48 monthly instalments of R3 000 per month are payable starting on 31 January 2009. Cost price of the vehicle R100 000 VAT R14 000 R114 000 Finance charges R30 000 R144 000 61

Special rules Rental agreements Any lease agreement other than an instalment credit agreement Time of supply Earlier of when payment is due; or when payment is received Value of supply = Actual lease instalment 62

Agent and Principal

Working No specific definition Relationship must be defined in a written agreement Agent can act on behalf of Principal Statement must be issued within 21 days after the end of the month during which transactions took place Invoice can be issued by agent (in the name of the agent) Invoices received can have the agent s details as the recipient of the goods 64