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VAT Registration, Accounting Transactions

Are there benefits of VAT Registration?

I am a freelance graphic designer earning roughly R500,000 per year, I am currently not VAT registered but am wondering if there are any benefits of voluntarily registering for VAT?

VAT registration threshold

If your VAT taxable turnover exceeds the VAT registration threshold you have to register for VAT – the VAT threshold is currently R1 Million.

Your VAT taxable turnover will be the total of your business income that is not VAT exempt or outside the scope. If however you only export or act as an agent for an exporter, then it pays to register for VAT as exports are VAT exempt.

However, even if you don’t have to register for VAT, you can choose to register for VAT voluntarily if you wish.

Voluntary VAT registration – Benefits

Reclaiming VAT on your costs

One of the main benefits of voluntary VAT registration would be so that you can reclaim VAT on your business costs but please be aware that not all business costs will include VAT.

Also if you export or are an export agent, then your income is zero rated and you can claim back the VAT on many of your expenses.

This may be particularly helpful if you are starting up a new business – in the early days your costs may exceed your revenue and claiming back VAT on your costs could help your cash flow.

Other benefits of VAT registration

As well as being able to reclaim VAT on costs, some other benefits of voluntarily registering for VAT may include:

  • If your turnover is relatively close to the VAT registration threshold then you may inadvertently not realise if you do breach the threshold, which could cause you to be charged with late VAT registration penalties. If you think you are likely to cross the threshold soon, it may be worth registering early to take away this risk and worry.
  • From a prestige point of view, not being VAT registered can make it clear to clients that you are a small business. If you want to appear to be a more sizeable business, VAT registration may help with this.
  • As you will need to be more organised with your accounting records (which is also a drawback covered below) this means your business finances will be in better order which will make it easier when it comes to your annual accounts as well as when it comes to analysing your businesses financial performance.

Registering for VAT voluntarily might sound like an obvious decision, but there are also drawbacks to consider:


Voluntary VAT registration – Drawbacks

Commercial pricing impact

If you register for VAT, you will need to add VAT on top of your fees to your local clients for those sales which are liable to 15% VAT – you need to discuss with your clients if this additional cost will cause them a financial issue or not.

The standard RSA VAT rate is currently 15%. If before VAT registration you charged a client R1,000, after VAT registration this would be R1,000 + R150 of VAT which totals R1,150.

If you are invoicing VAT registered businesses, they are unlikely to have an issue with this as they will simply reclaim the VAT you are charging them when they do their VAT returns.

However if you are invoicing individuals or small businesses that are not VAT registered, they will not be able to reclaim the VAT you are charging them. This means you become more expensive to them than if you are not VAT registered.

The example at the beginning of this article was that of a freelance graphic designer – this could mean that their clients are a mix of big businesses that are VAT registered and smaller businesses that are not, so they will need to look through their client base to see who may be affected if VAT were to be charged.

It might be that for some clients who can’t reclaim the VAT you are charging them, you may reduce your fees to absorb some or all of the VAT charged, but this will be a commercial decision for you to make.

Accounting Transactions & Administration

Being VAT registered means a little more admin for you and potentially higher accounting fees, depending on whether you will be doing your own VAT returns or not.

You will need to keep a track of your VAT accounting transactions and make sure you claim the correct amount of VAT on a business cost when you are entering it in your book-keeping system. This is where we can help with cloud based accounting and bookkeeping systems that have AI to recognise VAT when uploading documents. Your VAT inputs are actually done for you but the program. Some of the Cloud based Accounting systems even submit your VAT 201 from the system so no need to print out reports, log into SARS and then input data.

SARS enquiries

Registering for VAT means another type of tax that you could be investigated by SARS for – obviously if you do things properly and are organised with your daily recording of business transactions, this won’t be an issue. With A Cloud Based Accounting System, your records will be up to date on a daily basis, so bring it on SARS


Voluntary VAT registration – Summary

As you can see from this article, there are both benefits and drawbacks to voluntary VAT registration, you should consider your own specific circumstances carefully and if necessary discuss with an experienced accountant.