Section 15 (2) of the Value Added Tax Act was amended on 29 June 1998. This could have far reaching consequences for dentists who are contemplating incorporating their dental practices.

The South African VAT is an invoiced based tax (ie VAT payable on invoice) . However, a concession was made so that any vendor whose annual turnover did not exceed R2,5 million could elect to account for VAT on the payment basis (when payment is received). This concession was to give effect to the fact that smaller businesses often do not maintain sufficient accounting records to enable them, on a two-monthly basis, to bring debtors and creditors into account as is required on the invoiced basis.

A vendor who accounts for VAT on the invoice basis, accounts for output tax (VAT received) and claims VAT as input tax (VAT paid) upon the earlier of the two circumstances:-

• issuing of an invoice or the receipt; or
• making of any payment.

A vendor who accounts for VAT on the payments basis on the other hand only accounts for output tax (VAT received) and claims VAT as input tax (VAT paid) once payment has been made.

The South African Revenue Services believe this reason is not entirely valid as far as companies (which includes incorporated practices) and close corporations are concerned, as they are required, in terms of other legislation, to keep proper accounting records.

With effect from 29 June 1998 companies (which includes incorporated practices of dentists), close corporations and trusts, can no longer account for VAT on this basis and will therefore have to change to the invoice basis. Only natural persons and unincorporated bodies (eg partnerships) consisting of natural persons whose turnover is less than R2.5 million per annum can continue to account for VAT on the payment basis.

The Cash-Flow Problem

When a vendor changes over to the invoice basis he/she has to pay over the net amount of VAT due in respect of outstanding debtors less input tax (VAT paid) included in creditors and not yet claimed. This will generally result in more output tax (VAT received) payable. In order to avoid or alleviate cash flow problems the additional tax due as a result of this amendment can be paid in three equal instalments over a number of tax periods. The last tax period will be February 1999.

Please consult your accountants and examine the implications of the above before embarking on the route of incorporating your practice.