1696. Deregistration pitfalls
January 2009 – Issue 113
The compulsory VAT registration threshold is set to increase from R300 000 to R1 million in March 2009 and many business owners are looking forward to the day that they no longer need to submit VAT returns. However, businesses wishing to deregister should give careful consideration to the VAT implications of deregistering as it presents a potential minefield for the unaware.
The increase in the compulsory VAT registration threshold is an important step by Government towards its objective of simplifying tax compliance for small enterprises.
In essence, taxpayers with turnover levels below the new registration threshold have been given two options:· retain their status quo, i.e. do nothing; or · deregister as VAT vendors.
As far as deregistration is concerned, taxpayers have been given two further options:· register as a micro business and in future be taxed in terms of a new presumptive tax regime (which will automatically include deregistration as a VAT vendor); or · deregister as a VAT vendor on the basis of their turnover being below the new registration threshold.
Whichever option is exercised, cognisance should be taken of the consequences of deregistration to ensure that informed decisions are taken.Deemed disposal
When a business deregisters for VAT, it is deemed to dispose of all assets held and certain rights attaching to the business immediately before deregistration. VAT is payable to SARS on the consideration for the deemed supply which is the lower of the cost or the open market value of such assets and rights. This results in VAT being payable to SARS without any commercial sale having been concluded.
VAT also has to be accounted for on the amount of any outstanding trade creditors on the date of deregistration (to the extent that input tax deductions have been claimed on the supplies made by the creditor to the vendor).
In practice, if a person deregisters on 1 March 2009 and settles an existing creditor after that date, the cash cost of the expense is increased by the input tax deduction previously claimed.
In a worst case scenario, a business that has acquired capital assets shortly before deregistering for VAT, and who has not settled the supplying creditor before the date of deregistration, would have to account for VAT on both the value of the asset held as well as the outstanding creditor.
In this case the business would have been entitled to an input tax deduction of R14 but would be required to account for output tax of R28. It is therefore clear that careful planning is necessary before a business proceeds with the deregistration process.Concessions
The legislator has provided some relief for businesses who deregister due to the increased registration threshold. Essentially businesses will be entitled to settle any VAT liability resulting from deregistration (excluding any liability resulting from unsettled creditors at the date of deregistration) over a period of 6 months. The Commissioner for SARS has been given a discretion to extend the period beyond six months should the situation warrant it. No interest will be payable on the outstanding amount during this period. For businesses not registering in terms of the small business tax regime, this relief is only available if they deregister on or before 30 June 2009.
For businesses that opt to be taxed in terms of the small business tax regime in the future, further relief has been provided. Such business will be entitled to reduce the amount on which VAT must be paid on deregistration (excluding VAT on outstanding creditors) by R100 000. Essentially this results in a VAT saving of R12, 280 for the business.Conclusion
Careful and diligent planning needs to be done before a vendor decides to deregister for VAT purposes. Critical from a VAT planning perspective is that the vendor settles all creditors in respect of which the vendor has claimed input tax deductions on the supplies made to the vendor by the creditor before the date of deregistration. The vendor should also quantify any liability for VAT that will arise as a result of deregistering and the cash flow implications for the business.