Among the many legislated penalties that SARS apply to the various tax types, is the understatement penalty which is calculated in terms of the understatement penalty percentage table in Section 223 of the Tax Administration Act (TAA).  This penalty applies to all tax types covered by the TAA, where an understatement (as defined in the TAA) has been made by a taxpayer. 

I’ve recently come across a case where SARS applied the understatement penalty percentage table to a VAT return during a VAT review.  Due to the fact that the supplier invoices - on which the vendor had claimed VAT inputs did not meet the requirements of a valid tax invoice in terms of Section 20(4) of the VAT Act - SARS disallowed the invoices and applied the understatement penalty rules to each invoice that was disallowed.  SARS also charged the late payment penalty in terms of Section 39(1) and interest in terms of Section 39(8) of the VAT Act. In this particular case, the tax invoices were disallowed because they did not contain the customer’s (the vendor claiming the input) VAT number.

The onus is on the vendor to ensure that he/she is well versed in the provisions of the VAT Act and the TAA.  The vendor should be aware of the costly consequences of negligence when submitting VAT returns based on non-compliant tax invoices (therefore invalid inputs) to SARS, and should ensure that every tax invoice received from a vendor supplier in excess of R5 000 meets the requirements of a full tax invoice in terms of Section 20(4) of the VAT Act.  Failure to do so may result in some harsh penalties, if the VAT return is selected by SARS for a review and the supporting documents submitted are not compliant.

When the total consideration, including the tax portion, on an invoice exceeds R5 000, the tax invoice (full tax invoice) must state the following:

  1. The words ‘ tax invoice’ in a prominent place
  2. The supplier’s name, address and VAT registration number
  3. The customer’s name, address and VAT registration number
  4. A serial number and date
  5. A full and proper description of the goods or services supplied
  6. The quantity or volume of the goods or services supplied
  7. Either -
    1. The value of the supply, the amount of tax charged and the consideration for the supply; or
    2. Where the amount of tax charged is calculated by applying the tax fraction to the consideration, the consideration for the supply and either the amount of tax charged, or a statement that it includes a charge in respect of the tax and the rate at which the tax was charged.

Where the consideration for the supply does not exceed R5 000, the tax invoice (abridged tax invoice) need not meet requirements 3) and 6) above. 

As professionals, we can assist our clients in the following ways:

 

Accounting staff preparing VAT returns:- 

  1. Inform your clients of the abovementioned requirements, and request copies of supplier invoices when you prepare the VAT schedules and workings. 
  2. Check that the invoices meet the Section 20(4) requirements of the VAT Act, before you submit the VAT returns. 

 

Audit staff:-

  1. Train your staff so that they are able to identify when a tax invoice is not in compliance with the VAT Act.
  2. When performing detailed substantive tests, include steps to verify that the tax invoices in your sample meet the requirements of a valid tax invoice.
  3. Report any non-compliant invoices to management by supplier name.

 

Vendors should be vigilant when compiling their lists of inputs for their VAT returns and should ensure that their internal controls are adequate to identify non-compliant supplier invoices before they are processed into the accounting records and claimed in the relevant VAT return.

Nicci Weymouth

Senior accountant, Durban