Criminal liability for small businesses that fail to register for VAT

Businesses that exceed the R1-million value-added tax (VAT) threshold but do not register as VAT vendors may end up with a criminal record.

There has been an “influx of cases” in the Specialised Commercial Crimes Court because of taxpayers failing to register for VAT, says Jean-Louis Nel, tax director at Van Huyssteens Commercial Attorneys.

The VAT Act specifically empowers the Commissioner of the South African Revenue Service (SARS) to register a person for VAT where the person failed to do so. A person becomes liable to register for VAT if the R1m threshold is breached in the preceding 12 months.

It is common for SARS to register a business as part of its strategy to create a culture of compliance by widening the tax net, says Nel.

He explains that if the threshold is breached in Year 1 and in Year 4 the commissioner discovers that the enterprise should have registered for VAT in Year 1, the date of registration will apply retrospectively.

Cost and administration

Rupert Oberholzer, general tax practitioner at Pro-Accounting, says he has at least three clients who have received VAT registration notices from SARS in the past few weeks.

In one instance, the registration was retrospective. “In all these cases, it is very small businesses that are barely surviving. If SARS is going to backdate the VAT as far back as 18 months or two years, the business might as well close their doors and declares insolvency,” he adds.

A business may exceed the R1m turnover threshold in one year but dip under the threshold the following year. Oberholzer acknowledges the obligation to register for VAT once the threshold is exceeded.

However, the threshold of R1m is low, even for a small business that sells only clothes, for example. The compliance burden and costs to be VAT-registered are cumbersome.

The threshold has been amended only once, in 2008, from R300 000 to R1m. Nel says there is a need to balance the ability of small businesses to grow with the ability to collect revenue for the fiscus.

Pros and cons

There are advantages and disadvantages for businesses to register for VAT. A business that is not registered for VAT has the benefit of offering goods and services at a discount of 15%. “This may provide a business with a competitive advantage, as the goods and services are arguably cheaper.”

It may not be preferrable for a business that provides accounting services voluntarily to register for VAT. The services rendered will attract VAT at a rate of 15%, but the business does not have the corresponding input VAT claims to reduce the 15% output VAT.

A start-up that must acquire various assets may find it beneficial to register for VAT. The VAT payable on the assets can be claimed as a VAT credit, which means the start-up achieves a discount of 15%.

Once registered for VAT, there are obligations to be complied with, and non-compliance can result in a criminal liability. A taxpayer can at any time deregister for VAT. If the business ceases to operate, the taxpayer must deregister for VAT.

“It is often a misconception that a company that is not making any taxable VAT supplies is released from complying with the obligations under the VAT Act and Tax Administration Act,” says Nel.

Another side

However, there is another side to the story. Pieter Botha, founder of Fintax, has been trying for three months to register a company for VAT.

The first attempt to register was rejected. SARS said it phoned three times without success, although it is unclear who was phoned. For this and “other reasons”, the application was rejected.

The second application was lodged on 4 November with all the required documents, including bank statements for a full year and a letter stating that the business has reached a turnover of more than R2m. “So far, we have not heard a word on eFiling or email.”

And although a company is required to deregister for VAT if it ceases operations, it appears to be easier said than done.

Apparently, it can take between six months and a year to deregister a vendor for VAT, or Pay-As-You-Earn. “In the meantime, the business must submit returns, because if they do not submit the returns, SARS will issue penalties.”

Botha raised concerns about the powers of the Office of the Tax Ombud and its apparent lack of teeth to ensure service delivery from SARS. The Ombud’s recommendations are not binding, and there are no repercussions if the recommendations are not followed.

Former Tax Ombud Bernard Ngoepe was vocal about the need for the Ombud’s Office to be completely independent from SARS. He believed it would gain the confidence of taxpayers and counter the drastic powers given to SARS.

Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
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