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Why vendors fail VAT audits?

As accountants, we have noticed over the past years a significant increase in VAT and Income Tax verifications and audits conducted by SARS. These reviews and audits are not limited to the refunds due by SARS but includes returns where payments have been due and paid over to SARS.

A verification is simply a SARS “desk audit or examination” of relevant and specific documents or other relevant material requested by SARS from the taxpayer that they may provide either in writing or orally. A deadline is given for the provision of this information and documentation.  Depending on the findings, SARS may either accept the documentation or start an audit and may even simultaneously conduct a criminal investigation.

The audit on the other-hand, can be conducted at SARS offices, electronically or as often the case, at the taxpayers’ premises where SARS will examine accounting records and original documents over a specified period.

The processes of either a verification or audit or criminal investigation that SARS needs to follow and that taxpayers need to comply with are dealt with under the Tax Administration Act.  These provisions are simply an effective method that SARS uses to ensure that all vendors contribute honestly, fairly and regularly.


Some the reasons are as follows:

  • Employers fail to pay over VAT on company car fringe benefits. This mistake can be easily detected with the introduction of the compulsory completion of IT14SD, or a review of the IRP5 certificates for the relevant period.
  • Output VAT Payable on Insurance claims Received and the Sale of Asset

Any insurance claim received by you, whether it be for an asset or stolen cash, is deemed to be a supply by that insurance company to the enterprise (you) and the money received is deemed to be inclusive of VAT. For example, a motor vehicle insurance claim that was involved in an accident that has been refunded to the enterprise by the insurance company is deemed to be a supply to you, the enterprise inclusive of 15% VAT.  Therefore, the mistake that many VAT vendors make is that they are not declaring the output VAT on insurance claims received and paying it over to SARS.

Vendors must account for output tax on the short-term insurance compensation received (including third-party claims), especially if the vendors have claimed the input tax on the premiums paid for the cost of the short-term insurance.

  • VAT Output Clawback on Private Use of Motor Vehicles Not Paid to SARS


A VAT output “clawback” on motor and related expenses is payable to SARS on all motor vehicles owned by the VAT vendor, even if the motor vehicle is financed, and is based on a formula.  In fact, this is one of the first aspects of the VAT compliance requirements that SARS will audit.

The VAT output “clawback” on motor vehicles formula that is calculated monthly and disclosed under number 12 on the VAT 201 return is as follows:

A motor vehicle where input VAT on the purchase is denied:

The “determined value” of the vehicle (cost excluding VAT and finance charges) which is deemed to include the VAT clawback multiplied by 0.3% x 15 divided by 115

A motor vehicle where input VAT on the purchase is allowed:

The “determined value” of the vehicle (cost excluding VAT and finance charges) which is deemed to include the VAT clawback multiplied by 0.6% x 15 divided by 115

The VAT output payable is in essence a “clawback” of input VAT claimed on certain motor expenses that relate to the private portion of travel, for example, insurance, vehicle services, licences, etc.

Vendors must not claim input tax for non-qualifying items such as motor cars and entertainment (which includes meals and refreshments), as such was not used, consumed, or on-supplied for the purpose of making taxable supplies.


  • Non-disclosure of All Sales:

A mistake many VAT vendors make is that they believe that because a sale transaction is zero rated, they don’t need to disclose zero rated sales on their VAT 201 return.  This stance could not be more incorrect.  Zero rates sales must be disclosed separately on the VAT 201 return under number 2 if the sale is a local zero rated services supply, or under number 2A if the sale relates to goods exported.  By not disclosing zero rated sales on the VAT return results in discrepancies between the turnover on the annual financial statements of the entity and the VAT returns that will instantly trigger a costly VAT audit by SARS


  • Reconciliation of Accounting Records to the VAT returns before Submission

VAT vendors preparing their own books of account and VAT returns fail to reconcile the accounting records, the ledger, to the actual VAT returns submitted. For example, the turnover declared on the VAT returns do not agree to the turnover as per the general ledger, input VAT claimed does not tie up to cost of sales and expenses where VAT input claims are permissible and the total VAT amount due or refundable per the VAT 201 return does not agree to the VAT control account in the general ledger.

The difficulty for these VAT vendors arise when the financial statements, drawn up from the general ledger, are submitted together with the entity’s income tax return.  SARS’s computer system identifies the discrepancy between the income tax return and the VAT returns and flags it.


  • Neglecting to Register for VAT when the Turnover Threshold is Met

Not registering for VAT when the VAT threshold has been reached.  Maintaining accurate accounting records and receiving monthly management accounts is critical for the business owner to be able to determine in which month the business is likely to exceed the R1million threshold.


  • Failure to Obtain and or Retain Tax Invoices

A VAT registered enterprise may not claim input VAT where that enterprise is not in possession of a valid Tax Invoice.  A supplier has 21 days to supply a valid Tax Invoice in terms of the VAT Act.  Failure to obtain or retain valid TAX invoices will result in the VAT input being disallowed in a SARS verification or audit procedure with penalties and interest levied on the disallowed input VAT claim amount.


  • Incorrect Disclosure or Failure to Disclose Input VAT on Capital Goods

Another mistake is the failure to disclose input on capital goods correctly on the return or including it under number 15, “other goods and/or services suppled to you (no capital)”.  The VAT input on capital goods purchased during the VAT period needs to be reflected separately under number 14 on the return, “capital goods and/or services supplied to you”.


  • Failure to Respond to VAT Verification Requests from SARS

Failure to respond to VAT reviews within the required time may result in SARS disallowing the input VAT and leaving the taxpayer having to object to this additional assessment.


  • Incorrect Bookkeeping or Failure to Disclose Penalties and Interest

Another common mistake is for VAT vendors to incorrectly or not account for penalties and interest in the books of account and not include these amounts in their next VAT return.


At APS, we will ensure that your accounting records are compliant with the various legislation and generally accepted accounting principles and assist your bookkeeper in these matters so that any VAT verification or audit sprung on you by SARS can be professionally dealt with, giving you peace of mind.