Input VAT: When Sars says "no"
Accounting for VAT by a business should be a simple exercise. You simply take the VAT charged by you on your sales, deduct the VAT charged to you by your suppliers, and pay the difference over to the South African Revenue Service (Sars) every two months.
Right? Wrong! There are certain items where, notwithstanding the fact that you were charged VAT by the supplier, you are not permitted to claim an input VAT. This is according to Section 17(2) of the Value-Added Tax Act. Businesses often get confused over this, and end up claiming VAT that they are not entitled to claim. In the event of a VAT audit, this VAT is written back, making the business liable to Sars for such amount. In addition, penalties and interest are charged on top of the VAT owed.
So which expenses fall into the net where the claiming of input VAT is prohibited? In general, Section 17(2) provides that input VAT may not be claimed in respect of the following:
- Goods or services acquired by a vendor for purposes of entertainment;
- Fees or subscriptions payable for membership of any sporting, social or recreational club, association, or society;
- Any motor car supplied to or imported by the vendor; or
- Any goods or services acquired by a medical scheme or sickness, accident or unemployment fund for the purposes of supply by the fund of any medical or dental services.
The input VAT thus denied is however not completely lost as a tax deduction, since such VAT denied would be included with the cost of the goods or services supplied to the vendor. If the goods or services represent an expense, the VAT forms part of that expense, and if such expense qualifies for a tax deduction, the hitherto denied VAT portion is included with such tax claim.
Similarly, if the goods or services acquired form part of an asset, any disallowed VAT is capitalised together with the cost of that asset. Wear and tear allowances would thus be granted on the full cost including VAT.
Some of these prohibitions on the claiming of input VAT require further clarification:
The definition of "entertainment" is a wide one, and includes the provision of any food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind by a vendor in connection with an enterprise carried on by him. However, bear in mind that an employee who is out of town on business will incur costs on accommodation and meals, and provided that the appropriate tax invoice is obtained, input VAT will be claimable.
In the case where an employee who is out of town takes a client out for dinner, the cost in such case will be regarded as a "mixed supply", and as such, must be apportioned between the employee's subsistence and the entertainment element. This means that whilst input VAT will be denied in respect of the client's meal, it will be claimable in respect of the employee's meal.
The apportionment would not apply if the employee took a client out for a meal whilst at his home office - in this case, the entire input VAT would be denied.
The purchase of food and beverages for the purposes of making taxable supplies (eg, by a restaurant) does not fall into the above definition, and input VAT can be claimed in the normal manner.
Fees and subscriptions
The reference to fees and subscriptions in the VAT Act do not include memberships of professional or trade organisations paid on behalf of employees. In this case, it is Sars' practice to allow an input VAT to be claimed, provided that the membership of such organisation is a condition of employment, and that the tax invoice is addressed to the employer and not the employee.
The definition of "motor car" includes all vehicles designed primarily for the purposes of conveying passengers, and would cover ordinary sedans, hatchbacks, MPV's, and double-cab bakkies. A single-cab bakkie would however qualify for the claiming of input VAT, as would a bus designed to carry more than 16 persons, and any repair and maintenance to vehicles, irrespective of the type of vehicle, will also qualify for the claiming of input VAT.
Once again, this prohibition does not apply to those businesses that purchase motor cars for the purpose of making taxable supplies. This would include motor dealers as well as car hire firms. However, input VAT will not be allowed in respect of motor cars not purchased for resale or hire - company cars would fall into this category.