In one of our previous blog articles (VAT SARS), we looked at who needs to register for VAT but little explanation was given about South African VAT in general. This article will provide you with a simple overview of VAT and explain VAT related terminology.
What is VAT?
VAT stands for Value Added Tax. VAT is an indirect tax levied on the majority of transactions and is currently 14% of the selling price.
What is a VAT vendor?
A VAT vendor is anyone who is registered to pay VAT and makes regular VAT payments and VAT claims. If your business turnover is greater than R1 million per annum, you are required to become a VAT vendor however if your turnover is between R50 000 and R999 999 per year, you can voluntarily register.
Consult with your accountant on the benefits of registering if your turnover is less than R1 million.
VAT inputs and VAT outputs
When you are registered as a VAT vendor, you are required to add 14% to your sales price. The 14% that is collected from all sales is payable to SARS and forms your VAT output.
As a VAT vendor, you are also eligible to claim 14% VAT back on your production costs, raw materials, capital equipment and other expenses. This is known as your VAT input.
Understanding VAT as a tax
A great way to understand Value Added Tax is by remembering that VAT is a Tax on the Value that you Add to the product or offering you sell.
This Value is calculated by taking your VAT output (the 14% added to your sales price, paid to SARS) and subtracting it from your VAT input (the 14% claimed back from raw materials, etc). The difference you are left with is the tax levied on your markup.
What are zero-rated products?
Zero-rated or VAT Exempt products like road transport and medical services are products where no VAT may be paid or claimed back. You therefore do not add 14% VAT onto the selling price for these products. In some cases you may claim back 14% VAT on expenses that were incurred in creating a product, e.g. basic foodstuffs.
Advice on VAT registration
For expert advice, contact Brett at Dirmeik Consulting on 021 421 4444.