VAT: Avoid common pitfalls while managing cash flow

Value Added Tax (VAT) remains one of the most challenging aspects of compliance for business owners. Here are some key pitfalls to avoid and practical solutions to ensure your business stays compliant while you continue to manage your cash flow effectively.

Registration requirements: Don’t wait too long

One of the most common mistakes young businesses make is missing their VAT registration deadline. Registration becomes mandatory when your taxable supplies exceed R1 million in any 12 months. However, many business owners either overlook this threshold or delay registration, leading to penalties and back payments.

A good rule of thumb is to begin preparing for VAT registration when your turnover approaches R800,000. This gives you adequate time to implement proper accounting systems and train staff.

Common filing errors to avoid

SARS’s zero-tolerance approach to errors means that getting it right the first time is crucial. Common mistakes include:

• Claiming input VAT without valid tax invoices
• Incorrectly claiming VAT on excluded expenses (like entertainment)
• Missing zero-rated items in calculations
• Failing to reconcile VAT returns with financial statements

The solution? Implement a robust filing system for tax invoices and conduct monthly reconciliations rather than rushing at filing time.

Managing cash flow while staying compliant

The 15% VAT rate can significantly impact your cash flow, especially when dealing with late-paying clients. Here’s how to manage this:

1. Invoice promptly and accurately to avoid delays in VAT collection
2. Consider the timing of large purchases to optimise input VAT claims
3. Maintain separate bank accounts for VAT funds to avoid using them for operational expenses
4. Review payment terms with suppliers and customers to better align with VAT payment dates

Digital record-keeping requirements

SARS increasingly emphasises digital compliance. If you’re using a cloud-based accounting system like Xero, it’ll maintain digital copies of all your tax invoices, it’ll generate accurate VAT reports, provide a clear audit trail for you, and make for easy reconciliation with your bank statements.

Tips for success

1. Use accounting software, such as Xero, that automates VAT calculations and generates compliant tax invoices.
2. Schedule regular reviews of your VAT account to identify potential issues early.
3. Maintain a VAT calendar marking submission and payment deadlines.
4. Consider appointing a VAT specialist for complex transactions.
5. Keep up with SARS communications and updates.

When to get professional help

While managing VAT in-house works for some business owners, certain situations warrant professional assistance. These include:

• Complex transactions or unusual business structures
• Large refund claims
• SARS audits or investigations
• International trade considerations
• Significant business changes affecting VAT status

Remember, VAT compliance isn’t just about avoiding penalties – it’s about maintaining a healthy business that can grow sustainably. By understanding these common pitfalls and implementing proper systems, you can turn VAT compliance from a burden into a well-oiled part of your business operations.