It has become a common occurrence for vendors to receive a notice for a VAT review from SARS, which requires the vendor to submit supporting documentation in respect of a specific VAT201 return within 21 days. If the vendor fails to submit the supporting documentation, SARS may issue an additional assessment, disallowing the full value of the input tax claimed for that period. The vendor then needs to lodge an objection against this additional assessment and submit the necessary supporting documentation to substantiate the input tax claimed.When a VAT return is submitted, that return is measured against certain pre-set risk factors on the computerised system of SARS. If certain parameters according to this system are exceeded, a review letter will be issued automatically by the system to the particular VAT vendor. No historical profile is maintained per vendor, and there is no limit on the number of review letters that can be issued. SARS can issue a review letter for each VAT period, even for periods where the vendor had made a payment to SARS.
During December 2011 SARS issued a number of limited scope audit engagement letters to various large companies, more specifically companies in the construction industry. The information requested was to be submitted within 21 days from the date of the engagement letters, which were issued between 12 and 20 December 2011. Many of the companies had already closed for the holidays, and had limited or no staff available. Unfortunately the legislation provides no relief in this regard, except that the notice period should be reasonable. The engagement letters focused in particular on:
- the VAT treatment of indemnity payments received;
- bad debts recovered;
- creditors older than 12 months on which an input tax deduction was claimed;
- the sale of fixed assets;
- input tax claimed on deductions relating to “motor car” and “entertainment” expenses; and
- input tax claimed on supplies that are defined as “financial services”.
Regardless of the care taken by vendors to ensure the correct treatment of VAT claims, errors may still occur. Basic errors made by vendors include the claim of input tax deduction on the use of a rental vehicle for business trips, if that vehicle is a “motor car” as defined. Year-end functions and staff refreshments are defined as “entertainment”, and no input tax deductions may be claimed. It is only when these supplies are consumed or used to make taxable supplies, that a valid input tax deduction may be claimed.
Amongst others, SARS focuses on the correct VAT treatment of the following during the performance of an audit:
- validity of VAT invoices issued and received;
- zero rated sales;
- employee benefits as defined in the Seventh Schedule of the Income Tax Act;
- insurance claims received; and
- sale of capital goods.
It is very important that the staff responsible for the keeping of the accounting records should be adequately trained and informed in this regard, and sufficient controls should be in place to avoid these errors.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.