Value added tax (VAT) is an indirect tax levied on most transactions, presently it is 14% of the sales price.

If you are registered for VAT, you must add the 14% to your sales - in VAT language sales are called "outputs" - and pay it to the South African Revenue Service.

In turn, you may claim the 14% VAT you paid on your raw materials, stock, production costs, capital equipment and other expenses. In VAT language these items are called "inputs".

VAT makes a lot more sense if you understand the basic reasoning behind it, your output VAT - the 14% or your sales you pay to Sars - will be more than your input VAT which you claim back for business expenses. This is because you are putting a mark-up on your products and services. So the difference between what you pay to Sars and what you claim back is a tax on your mark-up.

VAT is a tax on the value that you add to the raw materials or products that you sell. By law, you must register for VAT if your turnover is more than R300 000 a year. You are then a "VAT vendor", which is someone who regularly pays over and claims back VAT from Sars.

Businesses with turnover lower than R300 000 may register voluntarily. There are some slight disadvantages and advantages to being registered. For example, paying VAT is an administrative and cash flow burden.

On the other hand, if you do business with large companies, they prefer you to be registered. In addition, if you are not a VAT vendor, you don't have to add 14% to your sales price. In this way you can undercut your VAT-registered competition. But the advantage is marginal, because you cannot, as your competition can, claim back the VAT on your expenses, which will push up your selling price. It is only if most of your suppliers are also not VAT vendors that you have a real advantage.

Speak to your accountant about whether you should register.

Keep in mind that certain products are "VAT exempt" or "zero-rated". In the case of products being "VAT exempt", no VAT may be claimed back or paid on these products. They include certain road transport and medical services.

"Zero-rated" are the products on which you do not have to add 14% VAT to the sales price, but you may claim back VAT on expenses that went into making the products. These apply mostly to certain basic foodstuffs.

You will not be able to claim back VAT on all your expenses. Among these are rental of residential accommodation, passenger transport, educational services, petrol and diesel, salaries and wages, depreciation of your equipment, passenger vehicles and entertainment.

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