Can my business account for VAT on the payments basis rather than invoice basis?

Direct answer

Usually, no. SARS's general VAT method is the invoice, also called accrual, basis. The payments, also called cash, basis is available only to specified qualifying vendors and requires an application and prior approval from SARS. Do not change your VAT accounting basis just because it would help cash flow.

Under invoice basis, VAT is generally accounted for in the tax period when the time of supply happens, even when a customer has not paid yet or the business has not paid its supplier. The general time-of-supply rule is the earlier of issuing an invoice or receiving payment, subject to special rules for particular supplies.

What this means in practice

The difference matters most where a business makes credit sales. On the invoice basis, the business can have output VAT to account for before it has collected the customer debt. It can also generally deduct qualifying input VAT on credit purchases in the relevant period, subject to the required documentary proof and any blocked-input rules.

The payments basis can change the timing of VAT accounting for qualifying vendors, but it is not a simple bookkeeping setting. SARS describes it as a different accounting method for specified qualifying vendors. Prior approval is needed. The terms of the approval and the business's supplies remain important.

Do not assume that all transactions follow the same timing simply because SARS has approved a payments basis. VAT 404 identifies special time-of-supply rules, including rules relevant to fixed property. A business that sells or buys fixed property, makes unusual supplies, or has mixed activities should not rely on a broad cash-versus-invoice rule without checking the particular transaction.

Step-by-step

1. Check your present VAT position.

Review the VAT registration notice, recent VAT201 returns, and accounting policy. Confirm whether SARS has already allocated or approved a particular accounting basis. Do not infer approval from how the accounting software currently records sales.

1. Identify the practical reason for considering a change.

Prepare aged debtors and creditors reports. Show whether the business regularly pays VAT before collecting invoices, or whether another issue is causing the cash-flow pressure. This helps distinguish a timing issue from a pricing, collection, or recordkeeping problem.

1. Review the current qualification rules.

SARS says payments basis is limited to specified qualifying vendors and subject to prior approval. Check the current VAT 404 guidance and the facts of the enterprise before deciding whether an application is appropriate.

1. Identify any special supplies.

List fixed-property transactions and any other supplies subject to special VAT timing rules. These may not follow the ordinary timing treatment that a business expects from the name of its accounting basis.

1. Apply to SARS before changing the VAT treatment.

Keep the written application and any SARS response. Do not amend VAT201 workings or change the timing of output and input VAT until the business has confirmation of the applicable treatment.

1. Reconcile each period after any approved change.

Match invoices, receipts, supplier payments, VAT201 figures, and the SARS approval. Retain a clear explanation for any timing difference from the prior accounting basis.

Documents and records to keep

• VAT registration notice and recent VAT201 returns.
• Aged debtors and creditors reports, cash-flow reports, and management accounts.
• Current VAT accounting policy and transaction reconciliations.
• Written SARS application, approval, or other correspondence.
• Tax invoices, payment records, and supporting documents for input VAT.

Important limits and exceptions

The payments basis is not an automatic right for a small business and should not be treated as an informal election. SARS approval is required. The research for this article does not set out a universal qualifying threshold, so do not rely on a threshold from an old article, another business, or an accounting-system prompt.

The invoice-basis explanation is also not a complete timing guide for every transaction. Fixed property and other special supplies can have separate VAT rules. A business should not use the payments basis to defer VAT on a transaction where a special rule applies.

This article does not deal with bad debts. A debt written off as irrecoverable can raise a separate VAT adjustment question, especially where the business accounts on invoice basis.

When to get tailored advice

Get tailored advice before applying if the business has fixed-property transactions, group-company transactions, mixed taxable and exempt supplies, or a significant VAT backlog. Also get advice where VAT returns have already been filed using a basis that may be wrong.

TaxProof can help organise the debtors, creditors, VAT201 history, and transaction records needed for a review. SARS decides whether a vendor qualifies for, and may use, the payments basis.

Related TaxProof guides

• VAT registration and VAT201 compliance
• VAT input tax expenses that are not claimable
• Related upcoming guide: VAT bad-debt adjustments, B01-BUS-006

Sources

• SARS VAT 404 Guide for Vendors