VALUE ADDED TAX (VAT) 101 – Part 2

Following our last article on VAT here, we received a lot of queries requesting clarity on certain VAT legislature which we will explore further. I encourage you to visit Part 1 of this topic before diving deeper into this topic by answering some of the questions.

How does VAT work?

In the previous article here, we gave a detailed explanation of this, however, in a nutshell, the way it works is that if you are registered for VAT, you need to add 15% VAT to the price that you charge for your products or services. The VAT portion that you would have charged on sales or revenue, is called Output VAT.

You can also claim VAT back from SARS on all the VAT that you have paid for your business-related purchases. So, if you paid R115, including VAT, for a product you bought, you can claim R15 back from SARS. VAT on purchases is called Input VAT.

The amount of VAT that you need to pay over to SARS, or claim back, is calculated by deducting Input VAT from Output VAT:

• If your Output VAT is more than Input VAT, you will need to pay SARS.
• If your Output VAT is less than Input VAT, you can claim back from SARS.

As you already know with SARS, there are always exceptions. There are cases where you cannot charge VAT and in others where you cannot claim a VAT refund for your purchases/expenses.

How does Output VAT work?

VAT is generally split into three categories:

• Standard-rated: where VAT is charged at 15%
• Zero-rated: where VAT is charged at 0%
• Exempt: where No VAT is charged

As a VAT vendor, you must always charge VAT on your goods and services at 15%, EXCEPT on items that are zero-rated or exempt from VAT. (Remember that).

The distinction between zero-rated supplies and exempt supplies is very important to understand as it determines whether you can claim Input VAT or not on the items.

• When you sell products or services under the standard (15%) or zero-rate (0%), you CAN claim Input VAT.
• If you sell products/services under exempt supplies, you CANNOT claim Input VAT.

Zero-rated VAT supplies (charged VAT at 0%)

The following transactions or goods are zero-rated supplies in South Africa:

• 19 basic food items, like milk and brown bread
• Petrol and diesel
• Paraffin
• Certain government grants
• Sale of a going concern (property or business that is still trading)
• Export of goods
• International transport of goods and passengers
• Certain services supplied to non-residents
• Services physically rendered outside South Africa

VAT Exempt supplies

The following transactions are exempt supplies for VAT purposes:

• Residential rental accommodation
• Public road and rail transport
• Educational services provided by an approved educational institute
• Non-fee related financial services, like interest

As already mentioned above, if you make only exempt supplies, you cannot claim any Input VAT. In fact, you don’t even need to register for VAT, even if your revenue exceeds the registration threshold.

How does Input VAT work?

You can claim Input VAT on all purchases and expenses that are business-related, but as mentioned there are exceptions. Below is a list of transactions that you CANNOT claim VAT on, even if you were charged VAT on them.

• Entertainment. This includes refreshments for your staff like tea and coffee, a customer lunch, and year-end parties or other events.
• Petrol and diesel, because these are zero-rated supplies
• Transport by road and rail, because these are exempt supplies
• Any purchases that you don’t have a VAT invoice for
• Salaries and wages, because these are exempt supplies
• Car purchases: There are exceptions to this exception, though. If you run a car dealership or car rental, you can claim Input VAT on the car purchase. If you buy a delivery vehicle or motorcycle, single-cab bakkie, transport truck, bus, or a special-purpose vehicle like an ambulance or a hearse, you are allowed to claim Input VAT.
• Long-term or life insurance premiums and interest, as these are financial services.
• Donations

What happens if you purchase business goods outside the country?

If you import goods, you must pay VAT on imports as well as customs duties. However, if you are a VAT vendor, you can claim these back from SARS as Input VAT.

How do I make sure that invoices are SARS compliant?

SARS has very strict requirements for invoices as the VAT Act guides these. It is crucial that the business knows what should be included on its own invoice, and what your suppliers need to include on their invoice in order for you to claim Input VAT. Should you as a vendor claim VAT using a non-compliant invoice and SARS conducts an audit, the VAT claimed will be reversed and you will be responsible for the amounts incorrectly claimed together with penalties.

To assist you in this regard, we have created a guideline here that will assist you to understand and meet guidelines for a valid tax invoice.

If you would like more information on VAT and dealing with VAT please contact us here.