Performing a Value-Added Tax (VAT) reconciliation

May, 2019 No Comments Uncategorized

The objective of performing a VAT reconciliation is to ensure that input tax and output tax has been declared to the South African Revenue Service (SARS) in full within the relevant period. This completeness check can be quite daunting; however, it is worthwhile for both SARS and the taxpayer.

Since the introduction of the IT14 Supplementary Declaration (IT14SD) by SARS a few years ago, it has kept many tax professionals very busy. According to SARS, the purpose of the IT14SD form is to provide a single ‘birds eye view’ by reconciling the VAT, PAYE and Customs Declarations to the IT14 Income Tax Declaration. Non-compliance or inaccuracy would generally lead to a SARS audit and could result in penalties.

The reconciliation is performed by confirming that the total output tax as declared in the VAT201 is equivalent to the total turnover/revenue for the same period and that the total input tax deducted in the VAT201 is equivalent to the total purchases and expenses for the same period.

From a taxpayer’s point of view, ensuring that all VAT has been accounted for in the correct period not only allows the taxpayer an opportunity to prevent stressful tax audits or costly penalties but also assists a taxpayer with identifying cashflow improvements where input tax claims are either not recorded in time or at all.

Whilst it is vital that all output tax must be accounted for within the correct period, a taxpayer has up to 5 years to claim input tax. However, claiming it on time would increase the taxpayer’s cashflow.

In a basic overview and ideal world, a company would pay 15% of their profit and non-taxable deductions for VAT purposes. This is illustrated by the following:

 

  Amount (Excluding VAT) Per Financial Statements Input Tax Output Tax Total (Including VAT)
 Sales R200   R30 R230
 (Cost of goods sold) R100 R15   R115
Gross profit R100      
         
 (Rental expense) R20 R3   R23
 (Telephone expense) R20 R3   R23
Net Profit before tax R60      
VAT on net profit R60 x 15% = R9
Input/output tax total   R21 R30  
VAT payable R30-R21 = R9
         

 

However, every business would incur an expense that would not have input tax or input tax would be disallowed, below we use the example of adding a salary to the above example. This illustrates that the VAT paid would be on the net profit as well as the VAT on the non-taxable expense.

 

  Amount (Excluding VAT) Input Tax Output Tax Total (Including VAT)
 Sales R200   R30 R230
 (Cost of goods sold) R100 R15   R115
Gross profit R100      
         
 (Rental expense) R20 R3   R23
 (Telephone expense) R20 R3   R23
 (salary expense) R10     R10
Net Profit before tax R50      
VAT on net profit 15% on 50 profit = R7.50

VAT Payable is R9

Difference of R1.50 (R10 x 15%) is due to VAT not being levied on salaries

Input/output tax total   R21 R30  
VAT payable R30-R21 = R9
         

 

In order to ensure complete compliance with legislation and that a reconciliation may reflect accurately is to record all supplies made on a VAT return whether it is standard rate, zero rate, exempt or a non-supply. Generally, a difference in turnover per the AFS and the VAT returns for the same fiscal period relate to the exempt and non-supply income.

The key to having a smooth reconciliation process, is it’s vital that the capturing and processing of all income/sales and all purchases/expenses are recorded accurately, correctly and timeously.

A typical process flow in order to perform the reconciliation would be to extract the Trial Balance (TB) for the month along with the tax amounts and perform a reasonability test. Then separating the output tax and input tax in order not to confuse the two. The input and output tax per line item (capital or not) will need to be extracted to a worksheet for the month. Should the output tax not match the income/sales for the period, this difference will need to be investigated. One of the reasons they may not match could be manual adjustments that are performed outside of the ERP system on the VAT calculation workings and thus will also need to be considered to confirm whether the workings are now accurate and match the difference.

Whilst in a vanilla scenario a reconciliation would agree 100%, difficulties arise when VAT rules override business rules. For instance, where certain documentary requirements are necessary to substantiate zero rating of a supply or for import VAT to be claimed only once the necessary documents are obtained, and proof that the VAT has been paid over to SARS is confirmed. Special time of supply rules are another major cause that result in these variances.

The financial risks for not performing a VAT reconciliation can be vast and significant as it could lead to additional assessments being raised by SARS, late payment penalties and interest as well as understatement penalties that range up to 200%. Proving that reasonable care was taken in preparing the VAT return prior to an audit notification will improve the vendors chance of requesting SARS to remit/reduce such penalties.

It is best practice for a company to perform a VAT reconciliation on the monthly TB prior to the submission of the VAT return to ensure that no differences arise and if they do, remediation steps can be taken immediately. Such proactive internal control procedures will provide easier and more accurate tax information and relief the risks of SARS raising additional assessments that may result in unnecessary difficulties and penalties.

The 4 step approach to VAT accuracy and VAT Assurance