One of the foundations of a successful Value-added Tax ("VAT") system is that there must be a clear audit trail that reflects the value added by each party throughout the supply chain, on which the VAT is collected. VAT documentation is, therefore, a crucial element of any VAT system.
Section 20(1) therefore places an obligation on a supplier to issue a tax invoice in respect of each taxable supply made by the supplier, and he must do so within 21 days of the supply. Section 20(4) prescribes the information that must be reflected on the tax invoice and requires, amongst others, that the VAT registration number of the supplier and that of the recipient be shown on the document.
Section 16(2)(a) of the VAT Act prohibits the claiming of input tax unless a tax invoice is held by the vendor claiming the deduction. The South African Revenue Service ("SARS") recently commenced disallowing input tax deductions where one of the requirements of a tax invoice does not appear on the document. SARS has gone further to even check the suppliers' VAT registration numbers, and disallow the input tax deduction where they believe the VAT number is not allocated to the supplier, or is incorrect. This is done even in instances where there is an obvious printing error on the invoice.
The view which SARS is taking is that section 20(4) prescribes that the VAT registration number of the supplier must appear on the tax invoice, and section 1 defines "VAT registration number" as the number allocated by the Commissioner to the vendor. Section 16(2) further requires that a tax invoice must be held by the vendor to be entitled to an input tax deduction. If the supplier's VAT registration number is incorrect, so SARS argues, the vendor does not hold a "tax invoice" as defined, and is therefore not entitled to the input tax deduction.
If this view of SARS is correct, the VAT Act would place an impossible administrative burden on both suppliers and on recipients. The supplier has an obligation to issue the tax invoice that reflects the VAT number of the recipient. If the supplier does not issue such a document, it is an offence in terms of section 58 of the VAT Act, which is punishable by a fine or even imprisonment. However, the supplier relies on the recipient to provide him with the recipient's correct VAT number. Does the supplier now have an obligation to check the validity of the recipient's VAT number on each and every invoice he issues, within the 21 day limit? Similarly, is the recipient obliged to check the VAT number of each supplier for each invoice he receives? If this is the case I feel sorry for institutions like Eskom, Telkom and municipalities.
Apart from the obvious impracticality and huge administrative burden of such a requirement, there are other practical difficulties to carry out such an obligation:
- The vendor database is only available on the SARS website which means that internet access is required to check the VAT numbers of suppliers and recipients. There are a large number of employers that do not allow internet access to their staff members for obvious reasons;
- The SARS vendor database has its limitations. It is not updated on a daily basis and it may take several days or weeks for a new vendor's number to appear on the database. Where a vendor's VAT registration is suspended for any reason (not cancelled), it is removed from the database, even though the vendor is still legally registered for VAT;
- Users who are not registered for e-filing, have very limited access to the SARS vendor database with limited search functionality.
Where no access to the SARS website is available, SARS suggests that the vendor should phone SARS to check the VAT number. Anyone with experience with the SARS call centres knows very well that they cannot adequately cope with the current volume of calls, let alone additional thousands of calls to check VAT numbers. What happens if the SARS officials go on strike?
Even if one checks the validity of VAT numbers at the time when the suppliers or clients are loaded onto the creditors or debtors system, the names of the vendors may subsequently change and so may their VAT status.
If there is an obligation on a recipient vendor to check the validity of his supplier's VAT number before claiming an input tax deduction as SARS suggests, it is also implied that the recipient has an obligation to check all the other required information on the tax invoice, including the address of the supplier and the individual serialized number of the invoice. Does SARS then also require a physical inspection of the supplier or customer premises and an inspection of the individual serial numbers of suppliers' invoices?
Suppliers and recipients do not have a choice but to accept in good faith that the VAT numbers (and other required information) which are provided to them are correct. It is not practical to check each and every invoice which is issued or received, or even to check the VAT numbers thereon on a sample basis for the reasons mentioned above. We can also not see any such requirement or obligation on suppliers and recipients in the provisions of the VAT Act.
The introduction to section 20(4) and section 20(7) of the VAT Act provides the Commissioner with a discretion to accept a document which does not reflect all the information as prescribed by section 20(5) of the VAT Act. The Australian VAT legislation provides for a similar discretion, and the Australian Tax Office has even issued a practice statement (PS 2004/11) in which it provides guidance to revenue officials as to when and how they should exercise their discretion. This statement provides, in essence, that if the auditor is satisfied that there is sufficient information available to establish whether the vendor qualifies for an input tax deduction, the document is accepted as a tax invoice. We fail to see why SARS cannot also apply the same or similar rules, especially in view of the impracticality of checking each invoice. Let's hope sanity prevails.