For businesses with a turnover of under RI million a year, registration for VAT is optional: you don't have to register as a VAT vendor, but you may if you want to. This can be a tricky decision for a new small business.
Here are some of the DISADVANTAGES of registering for VAT:
You avoid the cash flow problems that paying VAT can cause.
Remember that VAT is paid on an invoice basis. This means that if you have sent out a large invoice in a certain two-month period, you have to pay the VAT included in that invoice to SARS whether you have received payment for it yet or not. This can pose significant cash flow problems for small businesses. The problem is made worse if your debtors do not pay you at all; in addition to writing off their debt, you have the job of recovering VAT from SARS.
If you don't charge VAT, you can afford to set your selling prices marginally lower than you would otherwise, and therefore be a little more competitive. If you are not a VAT vendor, you cannot claim VAT back for the things you buy to make your product. So eventually you add all the VAT you have paid on your raw materials to your selling price anyway. Therefore it is only on the final portion of value that you add that no tax is paid.
Here are some ADVANTAGES of being a VAT vendor:
It is a dead giveaway that you have a turnover of less than R1 million per year. A new small business often needs to make a good impression in order to convince a corporate client of its reliability. Part of that good impression comes from putting up a show of being substantial without having to lie about it. It can help to have glossy brochures and business cards - and a VAT registration number.
If you have a capital-intensive business, your cash flow will take a lot of strain if you're not a VAT vendor. A machine of R1O 000 will cost you an extra R1 400 in VAT, which you can only claim back if you're VAT registered.
