Home‎ > ‎Carl's Tax Blog‎ > ‎

When tax maths gets really tricky...

posted 14 Jul 2011, 13:15 by Carl Nielsen
Here's an interesting fact that I recently discovered. I was submitting a VAT return and getting very annoyed with the new "improved" (in fact, "modernised" as SARS puts it) efiling VAT form. You see, for some obscure reason, you are required on your VAT return to reflect your inclusive-of-VAT turnover, as well as the VAT amount that is included therein. On the wonderful old form, it was possible to only enter the latter and the form was programmed to work out the former. Wonderful.

The new form insists that you enter the turnover figure and it calculates the VAT from that. Now, as any VAT vendor knows, you calculate the VAT amount from an inclusive-of-VAT amount by applying the so-called "VAT fraction" which is, based on the current VAT rate of 14%, 14/114. My annoyance stemmed from the fact that the form was getting this calculation wrong! For a while I thought either I was going mad (well, I was probably doing the return in the middle of the night, so it could well have just been fatigue) or my calculator was failing me. In the end, I confirmed that it was indeed the efiling system mucking it up.

A query to a fairly helpful chap at SARS led me to discover that the reason for the differences was rounding errors caused by the system applying, instead of the VAT fraction of 14/114, a fraction of 0.1228 (which is 14/114 but rounded off to 4 decimals). Annoyed, I resigned myself to having to use the "adjustment" entry on the VAT form to correct the mess.

I was therefore quite amazed to discover more recently that the use of the 0.1228 fraction by the SARS website is actually legislated. The VAT Act actually has a special section that specifies that the VAT fraction should be rounded to 5 decimal places (as it happens 14/114 = 0.12280, so based on 14% it actually only needs 4).  I can only assume that 14/114 is maths too complicated for the idiots who write our laws. The interesting effect of this is that, by law, a vendor is required to pay over less VAT than it has collected from its customers. As an example:

A (large) vendor charges R100m + VAT for a contract. He therefore collects R14m in VAT. When it comes time to pay this over, his calculation of what to pay is R114m X 0.1228 = R13,999,200. Okay, so on a deal worth R100m, R800 isn't a lot, but multiply it out across the economy and that's a fair whack of cash that SARS is giving back to vendors.

Of course the bad news is that every single accounting package out there does know maths, and calculates the VAT correctly. So more than likely the differences on the VAT return will just cause differences in the accounts that will have to be rectified - something that probably costs more in wasted time and effort than the few rands the rounding saves. Even when the law is bizarrely stupid in your favour, its most likely to do it in a way that is just plain annoying.