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What do I need to Register for with SARS as a Craft Distillery?
SARS, or the South African Revenue Service, is currently the biggest challenge that faces Craft Distillers and Entrepreneurs in South Africa.
There are various reasons why this is the case.
Most people will point fingers and blame ineptness, laziness, corruption, etc.
In my personal capacity however, I do not think that it is fair to paint all SARS employees with the same brush. There are many dedicated individuals within SARS that want to make things work, and try their utmost to help, but they are hampered by several issues.
What are the challenges at SARS?
Some of the issues hampering SARS, in my personal opinion, are:
- A massive backlog of applications currently exists – partly due to applications being put on hold pending rewrites of the law, and partly because of a lack of staff trained in Liquor Manufacturing and Excise.
- A serious lack of Trained Staff remains an issue, and it seems the moment Staff gain sufficient experience and training, they are either promoted or transferred to other departments. This continuous “Brain Drain” means there is little or no progress.
- An Old Mindset still exists within the Excise Department, where the individuals that are knowledgeable (and some of them are extremely knowledgeable) are still stuck in the days of Mega Liquor Manufacturing, where Distell, KWV and Edward Snell did basically everything. Neither the personnel nor the Excise Legislation has embraced Craft, and the potential it has for contributing to the economy in terms of VAT, Excise, Job Creation, Exports and stimulation of related industries like Tourism, etc.
- A lack of focus seems to exist, where, rather than tracking down, closing down and fining the dozens of large scale illegal and illicit Alcohol Manufacturers in South Africa, Inspectors seem more interested in making life difficult for the small Crafter doing his or her best to be compliant to the Law and Excise Regulations.
I can go on and on, but that is not the goal of this article.
It is important to note however that your SARS registration WILL be challenging, and it WILL take time.
Distillique and its Staff is not, and has never claimed to be, experts in SARS or Excise. The information we are sharing here has been obtain through Consultants, Clients, Experience, our Interpretation of the Law, and meetings with SARS and the SARS ExCo.
What do I need to Register for?
Now, your SARS Registration process, as with your Liquor License Application Process, is not limited to merely one single application. You will in fact be registering for four different Registrations (and this is excluding Income Tax, PAYE, SDL, etc.).
The four registrations are VAT, VMP, VMS and Bond.
VAT (Value Added Tax)
Now, any business that reaches a certain turnover threshold is required to register for VAT.
Our recommendation to you as a Crafter however is that you speak to your accountant to assist you in doing a Voluntary VAT Registration, whereby you can prove that within a certain period of time, you will reach that threshold.
This is especially important when and if sales to Liquor Stores, Pubs, Bars, Clubs, Hotels and the like, forms part of your Business Plan, as those Customers will be less inclined to do business with you if you cannot provide them with a VAT invoice.
Recent feedback, however, indicates that voluntary VAT Registrations are no longer as easy as it used to be. It seems that some individuals or companies used it as a loophole in the past to defraud SARS, and hence it is much more difficult to obtain, but if at all possible, we do recommend it.
VMP and VMS
The VMP (Primary Manufacturing Warehouse) and VMS (Secondary Manufacturing Warehouse) refers to the actual production area within your Craft Distillery. The VMP and VMS are not necessarily different rooms or buildings, but they are separate areas, and if contained within the same room or area, they need to be clearly indicated by painting lines on the floor.
The reason for this clear definition between the two areas is the fact that once your product crosses the line between the VMP and VMS, you need to declare that production, and within the prescribed period of time – normally 90 days – pay your Excise Tax on that production.
An often-misunderstood difference between the Beer, Wine and Spirits industries is that where Beer and Wine pay Excise Tax on Sales, Spirits pay on Production, hence it is not a good idea (Financially) to overproduce or stockpile, as you will run into Cash Flow problems.
Now, the line between VMP and VMS has recently shifted.
In the past, the VMP covered Fermentation and Distillation, with the VMS being Spirit Enhancement and Bottling. This meant that a Craft Gin Producer (buying in Ethanol and turning it into Gin) only required a VMS and not a VMP, as a Producer does not Distill.
Now however, the VMP includes Fermentation, Distillation and Spirit Enhancement, and the VMS covers only Bottling.
This move happened, partly, at request of SACDI (Southern African Craft Distilling Institute) – Distillique’s Industry Representative Organisation.
We requested the change due to needs of the industry, for the Direct Infusion and Maceration of Gin, for Batch Maturation of Gin, Barrel Aging of Gin and for the Barrel Aging of Rum. All of these activities used to fall under the VMS, and therefore, more often than not, Excise was due to be paid before the product was sold, leading to Cash Flow problems.
Moving these activities to the VMP means that the product can be completely finished before moving to VMS, where now, only Bottling occurs, and you can sell the product before needing to pay the Excise Tax.
For all intents and purposes, the area within a Bonded Warehouse lies outside the control of the Republic of South Africa, hence no Excise is due on products in Bond.
Bonded Warehouses serve three roles in a Craft Distillery.
- Barrel Storage for legally required aging (Brandy and Whisky)
- Product Storage for Export
- Raw Material Storage for Bulk Alcohol purchased under Rebate
Brandy and Whisky is not considered to be Brandy or Whisky until it is removed from their Barrels, as the law requires both to age for a minimum of 3 years. During that period therefore, no Excise is due. Production is only declared, and Excise paid, after the products leave the Barrel, enter the PMS, and get bottled.
Excise is also paid in the Country of Consumption and not the Country of Production, hence, if I produce a product for Export, that product is sent into my Bonded Warehouse, from there to the (for example) Airport via Bonded Transport and Storage, flow to its destination country, placed in a Bonded Customs Warehouse there, and in order to get the product released, my Distributor needs to be the Excise Tax of THAT country at the Warehouse.
Craft Spirit Producers, i.e. individuals or companies buying in spirits and turning that into a product, can apply for a Rebate Registration which will allow them to buy that Bulk Spirit under Rebate (meaning Excise is not paid on purchase) and then delay that Excise Payment until declaration of their own production. Rebate Registrations are however much more difficult to obtain these days, due to past abuses by some more disreputable Manufacturers.
This covers WHAT you have to register for with SARS. For more information on the SARS Registrations, Implementation, Record Keeping, Inspections and Audits, as well as for recommendations on Excise Consultants that can help you with this process, attend our B1 Craft Distilling Business Course.