{"id":3664,"date":"2018-07-11T00:00:00","date_gmt":"2018-07-10T22:00:00","guid":{"rendered":"https:\/\/www.ban.co.za\/ban-clients\/common-mistakes-sars-vat-audits-find-and-how-to-avoid-them\/"},"modified":"2022-03-15T15:47:43","modified_gmt":"2022-03-15T13:47:43","slug":"common-mistakes-sars-vat-audits-find-and-how-to-avoid-them","status":"publish","type":"post","link":"https:\/\/www.ban.co.za\/ban-clients\/common-mistakes-sars-vat-audits-find-and-how-to-avoid-them\/","title":{"rendered":"Common mistakes SARS VAT Audits find and how to avoid them"},"content":{"rendered":"

By Lindi Jonker<\/strong><\/span><\/p>\n

As accountants, we have noticed over the past years a significant increase in VAT and Income Tax verifications and audits conducted by SARS. These reviews and audits are not limited to the refunds due by SARS but includes returns where payments have been due and paid over to SARS.<\/span><\/p>\n

A verification<\/strong> is simply a SARS \u201cdesk audit or examination\u201d of relevant and specific documents or other relevant material requested by SARS from the taxpayer that they may provide either in writing or orally. A deadline is given for the provision of this information and documentation.\u00a0 Depending on the findings, SARS may either accept the documentation or start an audit and may even simultaneously conduct a criminal investigation.<\/span><\/p>\n

The audit<\/strong> on the other-hand, can be conducted at SARS offices, electronically or as often the case, at the taxpayers\u2019 premises where SARS will examine accounting records and original documents over a specified period.<\/span><\/p>\n

The processes of either a verification or audit or criminal investigation that SARS needs to follow and that taxpayers need to comply with are dealt with under the Tax Administration Act.\u00a0 These provisions are simply an effective method that SARS uses to ensure that all vendors contribute honestly, fairly and regularly.\u00a0 Any taxpayer can be selected for a verification (request for relevant material) or an audit for the purpose of proper administration of tax.\u00a0 Taxpayers can be selected for verification, inspection or an audit on either a risk basis or at random.<\/span><\/p>\n

When a VAT return is submitted to SARS, that return is assessed against certain risk factors on the computerised SARS system.\u00a0 If certain parameters are exceeded, a review or verification letter is automatically issued to the Vendor.\u00a0 SARS can issue a review letter for each VAT period so it\u2019s important to check your E Filing profile for any review notification you might have received.<\/span><\/p>\n

What to expect with a VAT verification or audit<\/strong><\/span><\/p>\n

When SARS conducts a verification of a Vendor\u2019s VAT return, they will issue a unique bar-coded letter electronically via E-Filing.\u00a0 Any refund will only be paid out once the verification process has been completed.<\/span><\/p>\n

The verification process often requires the taxpayer to submit the VAT input and VAT output detailed report, copies of the 5 largest supplier tax invoices and detail of any assets purchased including tax invoices.\u00a0 It is advisable to provide written reasons for large fluctuations in input VAT when submitting these documents.\u00a0 The supporting documentation can be uploaded via E Filing or hand delivered to your nearest SARS office within the time period specified by SARS.<\/span><\/p>\n

If you are subject to a verification and the verification process has been completed, you could still be referred for audit as part of the SARS compliance process.\u00a0 In the event of an audit, you will receive a formal notification of audit.\u00a0 If no formal notice of an audit is received, you will receive a notice of assessment.\u00a0 A notice of assessment is where findings were made during the verification process resulting in SARS adjusting the values on the VAT return from disallowing certain input VAT amounts.<\/span><\/p>\n

\"\"<\/a><\/p>\n

10 Common <\/strong>mistakes that business owners make in relation to VAT:<\/strong><\/span><\/p>\n

Hiring of Employees that Lack Knowledge of VAT Law:<\/strong><\/span><\/p>\n

By using or employing inexperienced staff to prepare and submit the company\u2019s VAT returns results in the inaccurate recording of VAT bookkeeping entries and the VAT returns being incorrectly completed raising the high risk of a SARS audit after the enterprise\u2019s income tax returns are submitted.\u00a0<\/span><\/p>\n

The person responsible for the bookkeeping should have sufficient knowledge of the VAT laws to ensure that VAT is applied correctly to all transactions or the business owner should outsource an accountant a day a month to check and correct incorrect VAT entries and to complete the VAT return.\u00a0 Some common examples of mistakes that inexperienced bookkeepers make is claiming input VAT on car hire or not taking the exempt fuel levy into account when processing airplane ticket invoices or payments.<\/span><\/p>\n

Non-disclosure of All Sales:<\/strong><\/span><\/p>\n

A mistake many VAT vendors make is that they believe that because a sale transaction is zero rated, they don\u2019t need to disclose zero rated sales on their VAT 201 return.\u00a0 This stance could not be more incorrect.\u00a0 Zero rates sales must be disclosed separately on the VAT 201 return under number 2 if the sale is a local zero rated services supply, or under number 2A if the sale relates to goods exported.\u00a0 By not disclosing zero rated sales on the VAT return results in discrepancies between the turnover on the annual financial statements of the entity and the VAT returns that will instantly trigger a costly VAT audit by SARS<\/span><\/p>\n

Incorrect Disclosure or Failure to Disclose Input VAT on Capital Goods <\/strong><\/span><\/p>\n

Another mistake is the failure to disclose input on capital goods correctly on the return or including it under number 15, \u201cother goods and\/or services suppled to you (no capital)\u201d.\u00a0 The VAT input on capital goods purchased during the VAT period needs to be reflected separately under number 14 on the return, \u201ccapital goods and\/or services supplied to you\u201d.\u00a0<\/span><\/p>\n

Capital goods and or services are amounts relating to the acquisition of an asset that is required to be capitalised to fixed assets or property, plant and machinery in terms of generally accepted accounting principles.\u00a0 Assets are purchased and utilised to generate income for the business over a period of some years and has a residual value at the end of each financial year.\u00a0 Therefore, assets are not regarded as an expense of the business and therefore the VAT input cannot be disclosed under ordinary standard goods and services. For example, the acquisition of new computers are capital goods and the installation of the computers are capital services directly related to the acquisition of the computers<\/span><\/p>\n

Output VAT Payable on Insurance claims Received and the Sale of Asset<\/strong><\/span><\/p>\n

Any insurance claim received by you, whether it be for an asset or stolen cash, is deemed to be a supply by that insurance company to the enterprise (you) and the money received is deemed to be inclusive of VAT. For example, a motor vehicle insurance claim that was involved in an accident that has been refunded to the enterprise by the insurance company is deemed to be a supply to you, the enterprise inclusive of 15% VAT.\u00a0 Therefore, the mistake that many VAT vendors make is that they are not declaring the output VAT on insurance claims received and paying it over to SARS.<\/span><\/p>\n

In addition, the selling price of an asset, other than an asset where an input VAT claim is denied, for example certain motor vehicles, is deemed to include VAT.\u00a0 The mistake that many VAT vendors make is that they do not disclose and pay over the VAT output on the sale of the asset.<\/span><\/p>\n

VAT output on the receipt of an insurance claim and the sale of an asset should be reflected under 1A of the VAT 201 return.<\/span><\/p>\n

Reconciliation of Accounting Records to the VAT returns before Submission<\/strong><\/span><\/p>\n

VAT vendors preparing their own books of account and VAT returns fail to reconcile the accounting records, the ledger, to the actual VAT returns submitted. For example, the turnover declared on the VAT returns do not agree to the turnover as per the general ledger, input VAT claimed does not tie up to cost of sales and expenses where VAT input claims are permissible and the total VAT amount due or refundable per the VAT 201 return does not agree to the VAT control account in the general ledger.\u00a0<\/span><\/p>\n

The difficulty for these VAT vendors arise when the financial statements, drawn up from the general ledger, are submitted together with the entity\u2019s income tax return.\u00a0 SARS\u2019s computer system identifies the discrepancy between the income tax return and the VAT returns and flags it.\u00a0 The consequence is that SARS will require the vendor to complete an IT14SD to explain the reconciling differences, or they will issue a letter to request an explanation of the differences.\u00a0 If there are no valid reasons for the differences that will satisfy SARS, they will immediately launch a full-blown audit that could have serious financial consequences for the vendor.\u00a0<\/span><\/p>\n

VAT Output Clawback on Private Use of Motor Vehicles Not Paid to SARS<\/strong><\/span><\/p>\n

A VAT output \u201cclawback\u201d on motor and related expenses is payable to SARS on all motor vehicles owned by the VAT vendor, even if the motor vehicle is financed, and is based on a formula.\u00a0 In fact, this is one of the first aspects of the VAT compliance requirements that SARS will audit.<\/span><\/p>\n

The VAT output \u201cclawback\u201d on motor vehicles formula that is calculated monthly and disclosed under number 12 on the VAT 201 return is as follows:<\/span><\/p>\n

A motor vehicle where input VAT on the purchase is denied:<\/u><\/span><\/p>\n

The \u201cdetermined value\u201d of the vehicle (cost excluding VAT and finance charges) which is deemed to include the VAT clawback multiplied by 0.3%<\/strong> x 15 divided by 115<\/span><\/p>\n

A motor vehicle where input VAT on the purchase is allowed:<\/u><\/span><\/p>\n

The \u201cdetermined value\u201d of the vehicle (cost excluding VAT and finance charges) which is deemed to include the VAT clawback multiplied by 0.6%<\/strong> x 15 divided by 115<\/span><\/p>\n

The VAT output payable is in essence a \u201cclawback\u201d of input VAT claimed on certain motor expenses that relate to the private portion of travel, for example, insurance, vehicle services, licences, etc.<\/span><\/p>\n

Neglecting to Register for VAT when the Turnover Threshold is Met<\/strong><\/span><\/p>\n

Not registering for VAT when the VAT threshold has been reached.\u00a0 Maintaining accurate accounting records and receiving monthly management accounts is critical for the business owner to be able to determine in which month the business is likely to exceed the R1million threshold.\u00a0 Failure to register can result in VAT being applied to all sales from the deemed date of registration and a business that is not registered for VAT will not have valid tax invoices on which they could have claimed the input VAT resulting in the business paying out more VAT than if they had been registered as a VAT vendor at the correct date.<\/span><\/p>\n

Failure to Obtain and or Retain Tax Invoices<\/strong><\/span><\/p>\n

A VAT registered enterprise may not claim input VAT where that enterprise is not in possession of a valid Tax Invoice.\u00a0 A supplier has 21 days to supply a valid Tax Invoice in terms of the VAT Act.\u00a0 Failure to obtain or retain valid TAX invoices will result in the VAT input being disallowed in a SARS verification or audit procedure with penalties and interest levied on the disallowed input VAT claim amount.<\/span><\/p>\n

To ensure that your suppliers issue you with a valid Tax Invoice, the following information must appear on all Tax Invoices that exceed R5000.00 in order for the invoice to be considered valid for a VAT input deduction:<\/span><\/p>\n