(c) South Africa Institute of Chartered Accountants. Contact SAICA for permission to reproduce this article., Tax

Rolling VAT refunds

Challenges in obtaining VAT refunds have not only been confirmed by SAICA’s own research but reaffirmed by the Office of the Tax Ombud and even the Nugent SARS Inquiry. However, business needs to continue, and business people make plans to keep their cash flow alive.

‘Cash flow is king’ is a saying used in all businesses and for small businesses with limited access to credit and equity markets, cash is the lifeblood of their business. The main cause of SME failure is in fact cash flow related. Therefore, all forms of cash flow remain critical, including refunds from SARS. The mere deferral of payment is in itself detrimental to SMEs with late payments by government and big business ranked as second and third in the biggest obstacles for SMEs.

Value-added tax (VAT) refunds are no exception.

SARS’ systemic non-payment and late payment of VAT refunds has also forced business to find alternate ways to manage their cash flows or face closing their doors. One of these mechanisms has been to ensure that no or small refunds become due by deferring input tax claims to subsequent periods where output taxes would have been payable. A lesser group of vendors may also try to avoid SARS audits altogether by decreasing the size of VAT refunds through spreading it over a longer period. This practice, however, seems misguided and less legitimate a concern, as the quantum of the refund is not the only risk factor that triggers a SARS audit.

The deferral is achieved by the vendor voluntarily claiming only a percentage of or specific input taxes in later periods in the VAT201. This conundrum came up in a recent technical discussion group, which then begs the question, is this practice within the confines of the law?

It should be acknowledged that the deferral comes at a significant cost to business who will not have access to this money as working capital or may have to defer for many months, losing interest as well. However, this is seen as a smaller cost than having SARS defer a large refund or even worse, unnecessarily dispute it for months, and still requiring full payment in the following months of all outputs taxes due.

SARS seems to have caught up on these practices and notwithstanding SARS’ conduct contributing to its creation, it seems to frown upon it.

Voluntary input tax adjustments

The voluntary adjustment is made on the VAT201 return, so the calculation seems to be the starting point to the enquiry. Section 16(1) of the VAT Act states that the tax payable by a vendor shall be calculated by him in accordance with the provisions of this section …

Section 16(3)(a)(i) VAT Act then also provides (own emphasis):

Subject to the provisions of subsection (2) of this section and the provisions of section 15 and 17, the amount of tax payable in respect of a tax period shall be calculated by deducting from the sum of the amounts of output tax of the vendor which are attributable to that period …, the following amounts –

… the amounts of input tax –

(i) In respect of supplies of goods and services … made to the vendor during that tax period.

So, it would seem on the face of it that on the normal parlance of the law that output tax and input tax shall be reckoned in the tax period that they occur. Therefore, if this is the only governing law then the practice of VAT refund rolling cannot be legally achieved as the inputs are set off voluntarily in subsequent periods.

This is not the end of the matter, however.

The first proviso to section 16(3) states (own emphasis):

Provided that –
(i) Where any vendor is entitled under the proceeding provisions of this subsection to deduct any amount in respect of any period from the said sum, the vendor may deduct that amount from the amount of output tax attributable to a later tax period which ends no later than 5 years after the tax period during which –
(aa) The tax invoice for that supply should have been issued as contemplated in section 20(1) …

The proviso clearly seems to provide a discretion to the vendor to deduct the input tax from the output in a later period, thus allowing refund rolling. In principle, SARS should have no qualms as the fiscus actually financially benefits from this practice and should disappear once refunds are paid timeously.

Percentage on aggregate vs specific invoice inputs

The second question that arises is whether both methods, either being a percentage of total inputs or an aggregate specific input per invoice, would be acceptable in law as the deferred amount.

In this regard section 16(3)(a)(i) VAT Act refers to ‘the amounts of input tax – (i) in respect of supplies of good and services’. Arguably this denotes the input tax on the goods and services collectively. Though many may argue that the scheme of VAT is input per invoice, as it is the context and the preferred interpretation.

A further hurdle to the percentage basis is that of discharging the onus of which specific inputs were deferred and providing SARS with those specific invoices. Though a retrospective reconciliation may be possible, it would administratively burdensome to compile an exact percentage amount. For example, if the total inputs were R100 and 20% was deferred (that is, R20), then if none of the invoices is exactly R20, with the least R10 and the second R12, then it would be difficult convincing SARS that only part of the R10 or R12 invoice was deferred and no double claim in the subsequent period existed. Invariable the R10 invoice may have to be forfeited as a reconciling difference.

Concluding remark

In conclusion, it would seem that the rolling of VAT refunds is in fact allowed by law but that vendors should at least apply the specifically identified invoice method and not a percentage basis. The former methods make it easier to track specific input amounts and reference them to specific invoices, allaying SARS fears of any abuse or double counting. Vendors are however warned that this practice may still raise concerns at SARS and trigger unwanted audits − the very thing some vendors were trying to avoid by decreasing refund amounts.

Pieter Faber is a SAICA Senior Executive in Taxation.

This article was originally published in ASA.