Are you newly registered for Value-Added Tax (“VAT”)? Did you acquire goods to set up shop before you were VAT registered and paid the VAT on those goods?
Generally, input VAT can be claimed on goods or services when you are a registered VAT vendor, but the question remains: can input VAT be claimed on goods or services acquired prior to VAT registration?
Taxpayers are often unaware of the relief the Value-Added Tax Act 89 of 1991 (“VAT Act”) provides for goods or services acquired while setting up a VAT enterprise. Section 18 of the VAT Act speaks to the “change in use adjustments”, which provides that those historically purchased goods or services are deemed to have been supplied to the VAT vendor only once they are used by the vendor to make VAT supplies. This is considered a change in use of goods for non-taxable purposes to taxable purposes.
It is important to note in this instance, when you can claim the input VAT tax credit, what to claim on and how to calculate the VAT tax credit. Section 18(4) provides that the input VAT should be deducted in the tax period the goods are first used for making taxable supplies and the general time of supply would dictate this being the first VAT period, but a proviso in the VAT Act determines that where a VAT vendor is entitled to claim VAT in a certain tax period, they can deduct that amount in a later period, but it is limited to five years after the end of the tax period in which the vendor first became entitled to the deduction. In summary, you can claim the input VAT within a period of 5 years after the effective registration date.
The input VAT is limited to the extent that the goods or services will be used by the registered VAT vendor to make their taxable supplies, which generally includes capital goods held and trading stock on hand at the time of registration. The amount of input VAT to be claimed is calculated using a special formula where the tax fraction (15/115) is applied to the lessor of the adjusted cost (including VAT), or the open-market value (“OMV”) of the relevant goods or services. The adjusted cost refers to the cost incurred in acquiring the asset and excluding cost which are not VAT inclusive or deemed to include VAT, such as finance charges or salaries and wages. In practice it is often difficult to determine the open market value and may lead to additional costs incurred by the taxpayer to obtain a valuation from an independent valuer.
The input VAT claimed on goods or services prior to the registration date is shown as a separate tax credit on the VAT201 form, which usually triggers a verification with the South African Revenue Service (“SARS”) and it is, therefore, important for VAT vendors to ensure they have the appropriate documentation ready when making this deduction.
If you have any queries regarding your business’s VAT obligations, you can contact Adrian de Geus on 021 840 1600 or firstname.lastname@example.org.