Claiming VAT before VAT registered

It is trite that only a registered VAT vendor is entitled to an input tax credit, provided all requirements for an input tax credit has been satisfied by that vendor. But what is the position where goods have been acquired before VAT registration and VAT was paid at the time – can the VAT on these goods be claimed after the taxpayer becomes a registered vendor?

The answer to this question lies in what is generally termed a “change in use adjustment”.  The VAT Act allows a taxpayer to claim an input tax credit where VAT was paid by that taxpayer on goods that where acquired and applied for purposes other than making taxable supplies and that is subsequently applied for the purpose of making taxable supplies.

Where a taxpayer carries on a business and is not VAT registered, that taxpayer cannot be said to have acquired any goods for the purpose of making taxable supplies. However, if the taxpayer still has the goods on hand at the time of VAT registration and will be applying those goods for the purpose of consumption, use or supply in the course of making taxable supplies, an input tax may be available as a change in use adjustment, despite the VAT having been paid before VAT registration date.

Where all the requirements are met, the VAT Act deems the supply of those goods acquired before the VAT number was issued, to occur in the VAT period where the change in use happens. Typically, in these cases, this will be in the first period after the VAT number has been issued to the taxpayer.  

While the general time of supply rules dictate that a change in use adjustment would have to be claimed in the first period or the period in which the change of use occurs, a proviso in the VAT Act may allow that taxpayer to claim the change in use adjustment in a later VAT period if not claimed in the period where the supply is deemed to have occurred.  

Furthermore, the amount of VAT that can be claimed is not necessarily the VAT amount paid as reflected on the invoice for the goods acquired before VAT registration. Rather a special formula applies to determine the amount of VAT claimable. The formula requires of the taxpayer to determine, amongst others, the extent to which the goods are subsequently applied for the purpose of making taxable supplies as well as what is called “adjusted cost”.  Depending in the nature of the taxpayer’s enterprise, these may be difficult to determine.

Input tax credits claimed as a change in use adjustment have a special field on the VAT201 return where such VAT claim should be disclosed and as such, are easy pickings during a SARS VAT audit or verification. Also, it has become apparent that some SARS auditors are not aware of this special rule which may cause SARS to incorrectly raise assessments to disallow VAT incurred before VAT registration date.

Taxpayers looking to avail themselves of this relief should take care to ensure the law is applied correctly and that the relevant supporting documents required are on hand to fend off assessments by SARS.

Author: N Theron