Value-Added Tax, or VAT, is currently typically charged at 14% on all taxable supplies of goods or services rendered by registered VAT vendors. Taxable supplies exclude exempt supplies, such as providing financial services, residential accommodation or educational services (see section 12 of the Value-Added Tax Act, 89 of 1991). Where a VAT vendor makes exempt supplies, it may not levy VAT on invoices rendered for such goods or services provided to the vendor’s clients.
Taxable supplies include though the supply of goods or services at a VAT rate of zero percent. In other words, where a VAT vendor were to supply zero-rated goods or services, it will levy VAT on the invoice at 0%, and not the standard rate of 14%. This may appear nonsensical at first, especially considering from an economic perspective when compared to exempt supplies: effectively no VAT is charged on an invoice whether the supply by the VAT vendor is exempt from VAT or charged at a rate of zero percent.
The significance lies therein that the exempt supplies are exempt from VAT altogether, while zero-rated supplies still qualify as “taxable supplies” as defined in the VAT Act. VAT vendors may therefore claim input tax for expenditure incurred in order to render taxable supplies, even if zero rated. This will not be the case for VAT exempt supplies.
Put simply therefore: input tax may be claimed against expenditure incurred to the extent that the expenditure is used ultimately to make either zero or standard rated supplies. To the extent that the expenditure is applied to make VAT exempt supplies, no input VAT may be claimed.
To use an example: imagine a VAT vendor, A (Pty) Ltd, which renders services to an Australian based firm (and which is zero rated in terms of section 11(2)(l) of the VAT Act). The invoice to the Australian firm amounts to R100 VAT at zero percent (therefore R100). To render the services, A makes use of a subcontractor which invoices it an amount of R50 VAT at 14% (therefore R57). To the extent that the services of the subcontractor is used to further the enterprise of A in making taxable supplies (even if at zero percent) to the Australian customer, A is able to claim an input tax amount of R7, thereby realising a profit of R50.
Had the services rendered by A amounted to exempt supplies for VAT purposes though in terms of section 12 of the VAT Act (such as supplying financial services for example), A would have still only invoiced its customer an amount of R100, yet unable to claim the input tax amount of R7 on the basis that subcontractor fee is no longer paid in the furtherance of A’s enterprise in making taxable supplies. In this scenario where exempt supplies are made, a profit of only R43 would have been made.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)