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What is VAT?

Starting a new business is one of the most exhilarating feelings in the world. You get to be your “own boss”, set your working hours, create the work culture you aspire to and make money doing the exact thing that you love. But, behind the scenes, there are a lot of regulatory elements to adhere to. One being VAT.

So what is VAT?

A value-added tax (VAT) means that consumption tax is added to a product at every stage of the production chain because the value is being added to the product. Revenue is raised for the South African government by requiring certain businesses to register and charge VAT on supplies of goods and services. Any business must register for VAT if the income earned in any consecutive twelve-month period exceeded, or is likely to exceed, R1 million rand. Once you have registered, you are classified as a vendor for the government. Learn More

More than 160 countries around the world use a VAT system. These are usually industrialized countries that make up the Organisation for Economic Cooperation and Development (OECD). Most industrial countries adopted their VAT systems in the 1980s.

But VAT has developed a negative connotation in some parts of the world. It is often seen by small businesses as an added burden by putting strain on the lower-income taxpayers. According to the International Monetary Fund, a study found that countries who adopt a VAT system initially feel the negative impact of reduced tax revenues despite its greater revenue potential.

But by understanding VAT and preparing effectively for your payment, you can reduce this burden and ensure you remain compliant.

How does Value-Added Tax Work?

Let’s start with the basics. In South Africa, VAT increased from 14% to 15% in April 2018. VAT is levied on the gross margin; the company’s net sales minus its cost of goods sold. Vat is based on a taxpayer’s consumption rather than their income. So, at each point of the manufacturing-distribution-sales and importation process of an item, VAT is levied, accessed, and collected. Sales tax is only assessed and paid by the consumer at the end of the supply chain.

There is also a limited range of goods and services which are subject to a zero VAT rate and/or are exempt from VAT. The following categories are levied at a zero rate and are known as ”Essential Goods” Learn More

1.    Food

–   Any food product, including non – alcoholic beverages;

–   Animal food;

–   Chemicals, packaging, and ancillary products used in the production of any food product 

2. Cleaning & Hygiene Products

–   Toilet Paper, sanitary pads, sanitary tampons, condoms;

–   Hand sanitizer, disinfectants, soap, alcohol for industrial use, household cleaning products, and personal protective equipment;

–   Chemicals, packaging, and ancillary products used in the production of any of the above 

3.    Medical

–   Medical and hospital supplies, equipment, and personal protective equipment;

–   Chemicals, packaging, and ancillary products used in the production of any of the above

4. Fuel, including coal and gas

5. Basic goods, including airtime & electricity

 This means that if your business sells, produces, manufactures, or imports goods that do not fall into the above categories, and if your turnover is greater than R1 million per annum, you are more than likely required to pay VAT.

Value-Added Tax Example

There are two major components of the (Value Added TAX) VAT see-saw.

On the one end there is OUTPUT-VAT that represents the tax paid to SARS on taxable sales.

On the other end there is INPUT-VAT, this represents all transactions that is bought from a registered VAT vendor.

If you or your entity is registered for VAT, you can deduct this from your OUTPUT VAT and reduce your VAT liability to SARS.

To illustrate by example, let’s assume that everyone except for the end consumer is registered for VAT:

A coffee bean supplier sells coffee beans to a barista for R115. The coffee bean supplier receives R100; the extra R15 represents OUTPUT-VAT, which the coffee bean supplier pays to the government. A portion (R15) of the R115 that was paid by the Barista can be claimed back from SARS as a INPUT-VAT.

The barista uses the coffee beans to make a cappuccino and sells it to a customer for R30 the Customer pays R34.50, including a R4.50 VAT. The Barista pays the R4.50 OUTPUT-VAT to the government.

BUT REMEMBER, at the end of the process the consumer is not registered for VAT and cannot claim any INPUT-VAT back, but is effectively paying OUTPUT-VAT to the Coffee Shop of R4.50 where this Coffee shop must pay it over to SARS.

The VAT process

Frequently Asked Questions about VAT

What does a value-added tax do?

A value-added tax (VAT) is a flat tax levied on an item. Portions of the tax amount are paid by different parties to a transaction, depending on the stage of manufacturing-distribution-sales.

What is Sales Tax?

Sales tax is similar to VAT, except that the full amount owed to the government is paid by the consumer at the point of sale.

Who benefits from a VAT tax and who doesn’t?

VAT’s impact would be felt less by the wealthy than the lower-income consumer because they spend a larger percentage of their take-home salaries on necessities. Better-off consumers could benefit if a VAT replaced income tax.

How can the negative potential effects of a VAT on lower-income individuals be fixed? 

 If the government were to exclude more necessary household goods and foodstuffs from the VAT or if they provided rebates or credits to low-income citizens.

When should I submit VAT returns and make VAT payments?

A business is required to submit VAT returns and make payments (or claim a VAT refund) by the tax period allocated to the business. Normally, these are made on or before the 25th day after the end of the tax period. Late payments will attract a penalty and interest.

When is my VAT due to SARS?

Top Tip: On 19 October 2012, SARS clarified in a notice that vendors who use eFiling may continue to submit their VAT declarations on the 25th of the month. The benefit of no interest, penalties, or prosecution will remain effective if the declaration and payment are submitted via eFiling (or EFT) on or before the last business day of the month. 

SARS.gov.za

We are proud to announce that Digital CFO has now registered for VAT as required by the rules and regulations as stipulated by SARS. The cost of our accounting services will remain the same, as 15% VAT is now added to the invoice that can be claimed back on your VAT201 returns if you are also registered for VAT.

 Please do not hesitate to contact us should you have any questions. We are dedicated to helping you!

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Become Financially Healthy by Mastering Your Understanding of Credit like a Pro in 5 Minutes!

Credit. The indistinct little word that all financial institutions use. Credit. But what is credit? What does it mean if “your credit score is too low” or “I need to increase my credit score”?

Read more to master your understanding of the term credit and become financially healthy.

What Is Credit?

The term credit can be used in many different ways, such as to describe an income entry into your company’s accounting system, money you have available to spend, a credit refund etc. But what we are focusing on, is borrowed credit. 

In a nutshell, the term credit refers to when you buy something now and only pay for it later. It is usually a contractual agreement between yourself and the financial institution where you lawfully agree to pay the institution back.

Credit can also refer to the creditworthiness or credit history of an individual or company. In this instance, credit is an entry that depicts an increase in liability. If you are granted a loan from a financial institution, your liability increases as you now owe money.

But depending on your individual or company’s credit score, you may be granted a loan with a higher or lower interest rate, or be denied entirely.

Types of Credit

  1. Revolving Loan: This means that the financial institution has granted you a certain amount of money you may spend at your convenience and you need to pay it back later, usually in a lump sum or as monthly repayments. The most common form of buying on credit is via the use of credit cards. Your payments will fluctuate each month depending on how much of the credit you have spent.
  2. Installment Credit/loans: This is when you borrow a set amount of money from the financial institution for a specific purpose, such as for the purchase of a car, stock for your company or to finance renovations. When you use installment credit, you will make equal monthly repayments to the financial institution over a period of time and these types of loans usually include interest.

Credit History

As mentioned above, your credit history will determine how much credit you can receive from the financial institution, at what interest rate you would be paying back and over what period.

A credit history simply reflects how you’ve spent your money over a period of time. This includes a summary of your credit cards, loans, and if you have paid your bills or debit orders on time.

If you have paid all your bills with mostly cash and have never borrowed any money, you won’t have much of a credit history, so the chances of receiving a large credit amount and good interest rate will be lower. However, if you have borrowed money before from a financial institution and have paid it back as agreed, your credit history will be stronger.

Your credit score is based on your credit history. Your credit score is a 3 digit figure that indicates how likely you are to repay your debts. So ultimately, the better your credit history, the better your overall credit score will be.

And that is what you need to understand about credit to make financially healthy decisions and choices. Always remember, build a legacy and don’t leave crippling debt behind.

For more information and tips and tricks to become financially healthy, follow us on social media or contact us directly for a free 15 minute online consultation.

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Cloud-based accounting systems and your business.

 

Let Technology do the work

There are still many outdated systems out there that are soon going to become redundant. In this interesting time, we found ourselves in. Many businesses have been tested in the continuity of their operations with the rise of the COVID-19 pandemic. How much anxiety did it cause you to move your staff off-site? What impact is it having on your business socially and economically? Were you able to continue? Have you considered cloud-based accounting systems as a place to start?

It is time for an update

Updating your systems can have benefits across the board and will have a larger impact than you might expect. These benefits may include cost saving, working with real-time data and systems integrating with one another. I have recently been to a potential client to conduct a systems audit. Everything was fine and dandy until all operations were disrupted. The staff could not access information from home, accounting, client service, and back-office information were all backed up on a server. Yes, information can be accessed by the VPN server, but let’s be honest. Anyone who has worked with these systems knows the shortfalls. It is slow, unstable and could cost a fortune. Your information can be lost in an instant, be it a server crash, theft or fire.

Cloud-based systems

The simple answer is cloud-based accounting systems such as Xero and SageOne. Your data is safe, secure and can be accessed anywhere in the world, as long as you have an internet connection and a computer.

The beauty of these systems is that it never stops evolving and is changing the landscape of business. Take this time at home to do some research on what systems you can use. Just in a week, you have heard about Microsoft Teams, Zoom or Google hangouts. Now is the time to make a proactive decision to protect your business in the coming months ahead. We do not know what the future holds, tomorrow is a mystery. But you can control if you want to stay ahead of the curve.

Please contact us to set up a video conference to chat about possible integrations in your business.

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Kwalifiseer my besigheid vir hulp van die regering in die COVID-19 pandemie?

Ons as besigheids eienaars is almal in ’n paniek oor die COVID-19 uitbraak. Ons is bekommerd oor hoe ons huishoudings gaan aanhou funksioneer in die geval van die stilstand van die ekonomie. Ons huishouding strek verder as net ons vier mure, dit is elke persoon wat vir ons werk en elke mond wat daardie persoon moet kos gee.

Eerstens is daar ’n Solidariteits Fonds https://www.solidarityfund.co.za/  begin met R150 miljoen kapitaal uit die staats koffers en R1 biljoen rand van elk die Rupert en Oppenheimer families. Enige persoon of besigheid kan skenkings doen aan die fonds deur ’n belasting aftrekbare donasie. Kom ons begin eers deur te gee wat ons het, wat ander nie het nie.

Daar is ’n voorlegging vir ’n spesiale dispensasie vir besighede in nood as gevolg van COVID-19.

Deur die meganisme kan werkers ’n salaris verkry deur die “Temporary Employee Relief Scheme”. Dit sal besighede help om mense steeds te betaal en afdankings te vermy. As ’n werknemer siek word deur blootstelling by die werk, sal hulle ook vergoed word. As laaste uitweg kan die WVS (UIF) fonds genader word vir hulp as jy op datum is.

Daar is 7 maniere wat ons as besigheids eienaars in nood hulp kan ontvang.

1) Jou werkers

Deur die belasting sisteem sal daar ’n subsidie van tot R500 per maand vir die volgende vier maande vir privaat sektor werkers verleen word indien hulle minder as R6500 per maand onder hul Indiensnemingbelastingaansporing (ETI). Hulle ondersoek ook nog ‘n verlaging in bydraes tot die WVS en SDL fondse.

2) Jou belasting voordele

SARS gaan werk om die betalings van indiensnemingbelastingaansporing terugbetalings van twee keer per jaar na een keer per maand te versnel om die kontant in die hande van werkgewers te kry wat voldoen aan die vereistes.

3) Jou SARS betalings

Besighede wie “compliant” is met ‘n omset van minder as R50 miljoen per jaar, sal toegelaat word om 20% van hul LBS betalings terug te hou oor die volgende vier maande asook ‘n porsie van hul voorlopige besigheids belasting sonder boetes of rente oor die volgende 6 maande.

4) Jou kontantvloei

Die departement van Klein Besigheid Ontwikkeling het R500 miljoen rand in fondse beskikbaar gemaak om dadelik klein tot medium grootte besighede wat in nood is te help deur ‘n eenvoudige aansoek proses by www.smmesa.gov.za

5) Jou besigheid wat help met die direkte behandeling van die pandemie

Die IDC het ‘n pakket saamgestel in samewerking met die DTI van meer as R3biljoen rand vir industriele finansiering om die COVID-19 pandemie aan te pak. Dit sal finaniering versnel vir die sektor.

6) Jou gastehuis, venue of spyseniering besigheid

Indien jy in toerisme is, is daar ‘n addisionele R200miljien beskikbaar gestel deur die departement van Toerisme om enige besighede in die toerisme of gasvryheids sector wt onder geweldige druk verkeer te help as gevolg van die reisverbod.

Al die bogenoemde hulp sal slegs gegee word as jou besigheid “compliant” is. Praat vandag met jou boekhouer oor wat die stand van sake is op hierdie aangehegte lys. Julle kan ook ‘n compliance “toets” doen by https://digitalcfo.co.za/is-my-smme-compliant/

Indien jy nie die goed in plek het nie kan ons help. Ons mobiliseer mense in ons direkte gemeenskap wat boekhouding kan doen, om julle deur ons besigheid Digital CFO te help.

Enige mense wat tans tuis is sonder ‘n inkomste wat gekwalifiseer is ‘n boekhouding of wat besig is met hul SAIPA of SAICA klerkskappe, of mense wat kennis en ondervinding het met CIPC en SARS, stuur asb jul CV’s na work@digitalcfo.co.za sodat ons kan kyk watter kos ons in julle huishoudings se monde kan plaas gedurende die tyd.

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How to determine if you qualify to be a Small Business Corporation & Pay less Tax

What is a Small Business Corporation (Section12E)?

Section 12E is a tax relief structure for small businesses SARS has put into place to help growing businesses in South Africa. There are talks of the Davis commission proposing a drastic reform to the current Small Business tax model which includes removal of some of the requirements to qualify as a SBC or to implement a refundable compliance rebate to companies who achieved tax compliance status. It still remains advantageous to meet the requirements of a Small Business Corporation.

The following tax table can be used for financial years ending 01 April 2018 and 31 March 2019

Taxable Income (R)Rate of tax
0 – 78,7500%
78,751 – 365,0007% taxable income above 78,150
365,001 – 550,000 20,080 + 21% of taxable income above 365,000
550,000 – and above58,930 + 28% of taxable income above 550,000

Qualifying requirements

  • The Company, Close corporation or Co-Operate is not an employment entity.
  • All shareholders or Members must be natural persons and not hold shares in any other entity (Not even for one day of the year)
  • Gross income may not exceed 20 million in the year of assessment
  • If more that 20% of income derives from investment income.
  • Entity may not be a personal service provider.
  • If the entity employs three or more unconnected fulltime employees for core functions of the entity during the tax year, the entity will qualify.

If your business qualifies as a Small Business Corporation, there are major tax benefits in the form of reduced tax rates and accelerated depreciation on productive assets which allows your company to depreciate its assets at an accelerated rate compared to other businesses. This results in a higher expense on your income statement that results in less tax.

Feel free to contact Digital CFO should you require more assistance.