One of the main features of the VAT system in South Africa is that it operates on a self-assessment basis. This means that businesses are responsible for calculating and paying their own VAT liabilities, based on the value of their taxable supplies. But how many businesses are under claiming or not claiming VAT where they could be?
Let’s look at input tax
Input tax is a type of value-added tax (VAT) that is levied on goods and services that a business purchases for use in the production of its own goods and services. In South Africa, input tax is administered by the South African Revenue Service (SARS) and is governed by the Value-Added Tax Act of 1991.
Input tax is also considered an asset because input tax on purchases of goods and services can be utilised for set off against liability for payment of output tax on sale of goods or services. Therefore, it represents a future benefit and in an asset. Input tax is an asset if there is going to be output tax liability on sale of goods and services from same GST registration and input tax does not belong to list of negative items as per section 17(5) of CGST Act.
Let’s look at some of the items that you cannot claim VAT on, even if there is VAT on the supplier invoice:
- 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 are the benefits of input tax in business?
Input tax is important in businesses as it allows you to claim back VAT that has already been paid on your purchases, provided that these purchases are used for making taxable supplies. For example, if a business purchases raw materials for use in the production of its own goods, it can claim back the VAT paid on these raw materials as input tax.
Input tax is a crucial aspect of the VAT system in South Africa, as it helps to ensure that businesses are only paying tax on the value that they add to their products and services. It also helps to create a level playing field for businesses, as it allows them to claim back VAT on their purchases and reduces the overall cost of production.
How to claim input tax?
To claim input tax, businesses must be registered for VAT and must keep accurate records of their purchases and sales. They must also issue VAT invoices to their customers and must charge VAT on their taxable supplies.
And remember to claim the input VAT on the following, because quite often these are overlooked:
- Bank charges: Your bank statement will in most instances comply with the requirement of a tax invoice.
- Short term insurance payments for your business: Make sure your policy contains all the relevant and correct information.
- Other monthly debit orders on business expenses, such as payments to your alarm company: You must still hold a tax invoice; insist that they send it to you monthly.
- Bad debts written off: You may claim the input VAT when you write off debt as an adjustment to input VAT. Note that the debt must be written off in your books and you must stop trying to collect it, or you must have handed it over for collection.
We are VAT Smart
That is where our VATSolve software can assist you in checking all your input tax transactions and highlight where VAT is not being claimed and where it could be.
Our software also captures post supplier invoices and doesn’t allocate the invoice to a vatable TAX code or forget to add one in.
Saving both time and mitigating risk are key goals of tax teams and Financial Managers. This is the premise that VATSolve is built on. VATSolve is a South African company that offers VAT automation software to companies that wish to increase efficiency and accuracy within their tax teams.