ALTIMAX (PTY) LTD

Altimax (Pty)Ltd prepare the public sector for impending VAT Change

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Previous Minister of Finance, Malusi Gigaba, is now synonymous with one of the most contentious announcements under his reign - the 1% VAT increase shared at the 2018 Budget Speech which comes into effect as soon as 1 April 2018. As individuals and businesses scramble to try and unpack the implications associated with this hike, Altimax, leaders in auditing, accounting, business advisory and financial training services, impart their expertise to help both public and private institutions understand and better prepare for the change.

Altimax believes the 1% increase relates to supplies and services rendered which are subject to the standard rate of VAT. Although zero-rated and exempt items or services remain unaffected, the 1 April deadline leaves limited time to review systems and processes which may present scenarios where different VAT rates apply. 

Altimax breaks down the VAT considerations that need to be made over the next few weeks in the lead up to the 1 April 2018 deadline:

VAT increase within the public sector

VAT has a pervasive impact on the finances of all entities registered for VAT, and affect a wide range of standard and non-standard transactions. Naturally, the 1% increase in the standard VAT rate will therefore have significant implications for all financial transactions.

In the public sector specifically, stringent Supply Chain Management (SCM) regulations and other such agreements like principal agent arrangements, present unique challenges. Severe penalties may be levied where VAT is incorrectly recorded and reported and as such, Altimax urges public sector entities to review their VAT processes and procedures and implement measures to accommodate the change. As part of good governance it is advisable that entities inform all their stakeholders of how the change in VAT will affect them.

In addition, Section 67A of the Act [Section 67A of the Value-Added Tax Act No 89 of 1991] addresses transitional arrangements which are based on timing of supply so these must be considered when implementing measures to accommodate the VAT change.

Timing of the supply

The VAT rate used should be determined by the date of payment or invoicing for goods or services rendered. If goods or services are received or provided prior to 1 April 2018, 14% VAT should be used. Any payment or invoicing processed after 1 April 2018 should indicate the new 15% VAT amount.

With projects of a capital or investment nature where work commenced prior to the announcement and will only conclude after 1 April 2018, Section 67A (1.c.II) stipulates that the amended rates may be applied based on “fair and reasonable apportionment”.

Altimax advises that consideration must be made on the basis of apportioning the rates, which need to be defensible during an audit.  Alternatively, it may be preferable to request progress certificates as at 31 March 2018, to reduce estimation uncertainty.

Accounting systems

There will be some accounting systems that will not accommodate two rates of VAT. In this instance, the preceding 14% VAT rate may be applied, states Altimax. Here are some additional systems specific information:

  • For municipalities, it is essential that any new system/s which may be implemented, be compliant with the Municipal Standard Chart of Accounts (mSCOA) which will be able to process the revised VAT amounts.
  • All service providers should be engaged if necessary to ensure timing issues can be appropriately recorded.
  • All reporting templates should be reviewed. For example, where a local municipality delivers services on behalf of a district municipality, the monthly reporting tools may still refer to 14%.
  • Formulas may need to be amended manually for amounts where VAT is apportioned
  • Public sector entities need to be mindful that the revised VAT amounts may also extend to payroll where VAT may be incorporated into the calculation of fringe benefits.
  • Any policy which refers to 14% VAT will need to be updated and authorised, and should not preclude the possibility of having to use 14% if the circumstances call for it.

The successful monitoring of VAT transactions will require officials to have a sound understanding of the timing rules, and how to identify exceptions.

Published tariffs

Where tariffs are published for public consumption – like water as an example, the increase in VAT will impact the tariff and the same may be true for other goods or services provided by the entity. Altimax recommends that published pricing schedules be reviewed, updated and communicated to stakeholders.

Given that an increase in tariffs may be a sensitive issue, engagement with affected communities and clients would be advisable.

Grants

Grant revenue is generally recognised based on the VAT inclusive value of the related expenditure.  The expenses incurred for the grant from 1 April 2018 will be at 15% VAT, which could impact that the grant funding as it may not be sufficient for the grant expenditure due to the VAT increase. If an entity is not registered for VAT, this may result in a funding shortfall.

Irregular expenditure

Although this term has received significant political attention of late, it is imperative that public and private business entities understand and assess the impact of VAT on supply chain management with specific focus on irregular, fruitless and wasteful and unauthorised expenditure.

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