On 1 April 2018, Value-Added Tax (VAT) will increase for the first time in 25 years, from 14% to 15%.
If you’re a small business owner, it’s likely that you’ve never had to deal with a change in the VAT rate before and don’t know where to start to get your systems and processes VAT-ready, without impacting your cash flow and operations.
Here are a few tips to get your small business VAT-ready, come 1 April.
- Test. If you are a small business that still uses manual processes like spreadsheets to calculate and record VAT, consider creating dummy sheets and invoices to ensure you are processing the additional VAT correctly and that you can process transactions at 14% on 31 March and 15% on 1 April. Also consider that, if a customer returns a product on 1 April that they bought on 31 March, it will need to be refunded at the old VAT rate.
NOTE: From 1 April 2018, all receipts, invoices, quotes, adverts, credit and debit notes must reflect the new rate, so test your systems beforehand to make sure there aren’t any errors.
- Understand time of supply. The transaction date, or time of supply, is probably the biggest consideration for businesses when applying VAT to sales. The VAT Act stipulates that the time of supply will be either when an invoice is issued or when payment is received – whichever happens first. For example, if you invoice for a sale on 31 March but are only paid on 2 April, the VAT rate of 14% will apply. If you receive payment on 1 April but have not yet invoiced for the sale, then VAT should be charged at 15%.
NOTE: Consult the VAT Act for rate-specific rules applicable to contracts and supplies starting before and ending on or after 1 April 2018.
- Automate where possible. Cloud-based, automated accounting solutions, like Sage One, will be VAT ready, come 1 April. Businesses using these solutions don’t have to worry about staying on top of the different VAT rates because the system will automatically generate the correct VAT invoice, quote and debit or credit note.
NOTE: All transactions are stored and readily accessible in the cloud, from anywhere, ensuring businesses are compliant with SARS and VAT laws.
- Educate your colleagues. It’s crucial that your team members know how to raise invoices and credit notes that are processed before and after 1 April, and how to process refunds for sales that occurred before this date, as these will attract different VAT rates.
- Adjust your pricing. The VAT Act states that displayed pricing and adverts must include VAT (unless the product is zero-rated). Some small businesses might want to close shop for the day to adjust their shelf and online pricing to reflect the new rate in time for the new business week on Monday. However, those that are unable to do this can display a notice at the till point, stating that prices do not include VAT at the new rate and will be adjusted at the tills.
NOTE: This grace period is only in place until 31 May, after which all pricing must include the new rate.
- Check your own quotes and invoices. Any quote or invoice you receive for stock purchased after 1 April should reflect the new VAT rate. You’ll need to submit this documentation when claiming input tax. If your supplier does not calculate VAT correctly, you will be liable for the shortfall, which could impact your cash flow.
NOTE: You will also incur penalties if you under- or over-declare VAT on your VAT201 return – another reason why automating the accounting process is a good idea.
- Get reporting ready. The next VAT201 return you submit to SARS will be more complicated because you will need to calculate input and output tax at different rates, not to mention the apportionment rate that will need to be calculated for contracts and services taking place before and after 1 April.
NOTE: Again, automated solutions can take care of this for you but, if you’re using manual processes, you might need to consult an accountant to make sure you’re not over or under reporting VAT on your reconciliations.
Complying with the new VAT rate is a massive administrative task for businesses of all sizes – and they don’t have much time to prepare.