South African compliance requirements are many, and for small to medium-sized enterprises (SMEs), this means long processes. Compliance is one of the strongest pillars of successful businesses and can mean anything from business registration to industry-specific regulations. Before finishing the first part of compliance, SMEs need to determine if they need to register for Value Added Tax (VAT) or Turnover Tax.
The distinction between these two is important to note for SMEs. Because tax registration is in the early stages of the compliance process, SMEs need to understand their business model and revenue to know which one to register for.
In this article, we explore the differences between VAT and turnover tax, which SMEs qualify for each one and what the registration process is like.
What is VAT and Turnover Tax?
VAT is a 15% consumption tax on goods/services for businesses with R1 million+ annual turnovers, while Turnover Tax is a simplified, optional tax for micro-businesses (under R1 million) replacing Income Tax, VAT, and Capital Gains Tax. VAT is consumption-based, whereas Turnover Tax applies directly to total revenue, easing compliance.
Key Differences Between VAT and Turnover Tax
There is not much to separate these two taxes; however, SMEs still need to know the key differences to make the compliance process easier.
Eligibility and Threshold
Turnover tax applies to small businesses, typically referred to as micro businesses. These enterprises have a turnover of less than R1 million. In comparison, VAT registration is mandatory for businesses with a taxable turnover that exceeds R1 million in 12 months.
Tax Calculation
Turnover Tax is calculated on total revenue (turnover) regardless of expenses. VAT is calculated on the value added (output tax minus input tax on expenses).
Administration
VAT has strict record-keeping and bi-monthly record-keeping for monthly submissions to the South African Revenue Service (SARS). The turnover tax has two interim payments, the first in the middle of the tax year (29 August) and the second at the end of the tax year (27 February) and must be made based on the estimated turnover of the business for that tax year. The form used is a TT 02.
Tax Rate
Turnover tax ranges from 0% to 3% based on income brackets. Examples include:
- R0 – R335 000 = 0%
- R335 000 – R500 000 = 1% of the amount above 335 000
- R500 000 – R750 000 = 1 650 + 2% of the amount above 500 000
- R750 000 and above = 6 650 + 3% of the amount above 750 000
VAT is a standard rate of 15%.
Expense Deductions
Turnover tax does not allow deductions for business expenses. VAT allows the deduction of VAT paid on business inputs (input tax).
These are just some of the differences between the two taxes.
Advantages and Disadvantages of Turnover Tax
Opting for the turnover tax system can offer several benefits for small businesses, such as:
- Simplified Compliance: The calculation of turnover tax is quite straightforward and based solely on gross turnover. For SMEs, this means you don’t need complicated accounting for expenses, depreciation, or traditional profit calculations.
- Lower Tax Rates: The tax rates applied under the turnover tax system are generally lower than standard income tax rates, potentially resulting in a lower tax liability, especially for businesses with high gross turnover but low-profit margins.
- No VAT Registration: SMEs registering for turnover tax are not required to register for VAT, further reducing administrative complexity and compliance costs.
While very beneficial for micro businesses, turnover tax also has potential downsides that owners need to be aware of. These include: - Exceeding the Turnover Threshold: SMEs that do not monitor their annual turnover risk exceeding the turnover tax limit. If your business exceeds R1 million within the tax year, you will be required to deregister from the turnover tax system and revert to the standard business tax system, potentially leading to unexpected tax burdens and penalties.
- Inability to Deduct Expenses: SMEs opting for turnover tax cannot deduct operating expenses when calculating turnover tax. Businesses with high operating costs relative to their gross income might choose the standard income tax system, which allows expense deductions resulting in lower tax liability despite higher rates.
- Misunderstanding Excluded Income: Not all income received by a business qualifies for turnover tax calculation. Passive income, such as interest or dividends, is usually excluded. Incorrectly including or excluding income can lead to incorrect tax calculations and SARS penalties.
- Understanding Compliance Duties: Turnover tax still requires accurate record-keeping, timely filing of returns, and prompt payment of tax liabilities. Failure to meet these obligations can result in penalties, interest, or deregistration from the system.
How to Register for Turnover Tax
Registering for turnover tax is done on the SARS website by simply following these steps.
Step 1: Qualifying Test
The first thing you need to do is a quick test, which will determine if you qualify for it. You can access the test on the SARS website.
Step 2: Fill in the Required Forms
If you qualify for turnover tax, you will be required to fill in a TT01 application form. The form can be completed manually or online, and once filled-in you need to submit your registration on the SARS Online Query System (SOQS).
When Should an Application for Registration be Submitted?
Your registration needs to be sent before the beginning of a year of assessment (a year of assessment runs from 1 March to 28 February), or a later date that may be determined by the Commissioner in a Government Notice.
The timing differs a little for new registrations and existing registered businesses:
- New Businesses: Should a new micro business start trading during a year of assessment and wishes to register for turnover tax, an application must be sent within two months from the date that the business started.
- Existing Businesses: Existing micro businesses can register for or switch to turnover tax before the start of a new tax year.
- Submission of turnover tax returns can be made on the following channels:
- Make an appointment on the SARS eBooking system
- E-mail SARS
SARS will send you a letter about the outcome of the application. Where the submitted TT01 form is incomplete, the taxpayer will be informed, and the application will be reconsidered once all of the information has been provided.
How Deregistration Works
- Voluntary Deregistration: A person may elect to voluntarily deregister before the beginning of a year of assessment or a later date announced by the Commissioner in a Government Notice. Deregistration will be effective from the beginning of that year of assessment.
- Compulsory Deregistration: You may be forced to deregister if your turnover exceeds R1 million for a given tax year or if certain qualifying criteria are no longer met.
In this case, your business will be deregistered from the beginning of the month following the month during which you no longer qualify for turnover tax.
