The importance of performing a turnover reconciliation
by Dinisha Munien
AS a self-assessing tax, value-added tax (VAT) forces vendors to calculate and declare a tax liability to the South African Revenue Service (SARS) – and that also means SARS is less likely to show leniency towards defaulters.
During a SARS audit, vendors must often perform a turnover reconciliation – a comparison of the turnover declared on the monthly VAT returns to that declared in the annual financial statements. All things equal, there should be no unexplained differences, but some businesses have valid differences in their reconciliation. Recording and providing support for any reconciling items gives meaning to the difference in the reconciliation. Not maintaining a record of the differences results in a time-consuming exercise years later under the pressure of a SARS audit.
VAT vendors separately declare their standard rated and zero-rated and non-taxable supplies made during a tax period. For accounting purposes, certain supplies may be treated as reductions in expenses rather than revenue – a reconciliation that results in the revenue being higher in the VAT returns compared to the amount recorded as revenue in the financial statements.
Without vendors providing reconciliations, SARS can reconcile figures based on its records. These figures might reflect the revenue in the VAT returns is higher than in the financial statements. Vendors may be relieved to know they have not underpaid VAT and that SARS will not impose penalties, interest or additional tax – but may not realise SARS might impose company tax of 28 percent of the difference. The onus for proving there is a valid reason for each reconciling item lies with the vendor. Hence, ensuring all reconciling items are well-documented and correctly treated for VAT and income tax is critical.