VAT: The difference between standard-rated, zero-rated and exempt supplies

There are three categories of supplies that can be made by a VAT vendor: standard-rated, zero-rated and exempt supplies. Output tax must be levied on all supplies except exempt supplies. The VAT Act gives specific guidelines for zero-rated and exempt supplies but these fall outside the scope of this article. Please contact your tax practitioner for more information.

The following simplified formula is used to calculate the amount of VAT that a registered VAT vendor have to pay to SARS or can claim as a refund from SARS:

Output VAT levied on standard-rated and zero-rated supplies* – Input VAT claimed on qualifying expenses = Net VAT due to/(refundable by) SARS

* A supply is defined as the provision of a product or service by a VAT vendor in return for payment in cash or otherwise.

Standard-rated supplies

Standard-rated supplies are supplies of goods and services on which output VAT is levied at a rate of 14%. The input VAT incurred on purchases of goods and services to generate standard-rated supplies can be deducted from output VAT payable to SARS.

Example 1:

  1. XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
  2. The inventories were sold for R10 000 (VAT included).
  3. All inventory sales qualify as standard-rated supplies.

Net VAT due to/(refundable by) SARS will be calculated as follows:

Output VAT levied on standard-rated supplies (R10 000 x 14/114) R1 228
Less: Input VAT on purchases to make standard-rated supplies (R7 000 x 14/114) (R 860)
Net VAT due to/(refundable by) SARS R 368

Zero-rated supplies

Zero-rated supplies are supplies of goods and services on which output VAT is levied at a rate of 0%. The input VAT incurred on the purchase of goods and services to generate zero-rated supplies can be claimed against output VAT payable to SARS.

Example 2:

  1. XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
  2. The inventories were sold for R10 000 (VAT included).
  3. All inventory sales qualify as zero-rated supplies.

Net VAT due to/(refundable by) SARS will be calculated as follows:

Output VAT levied on zero-rated supplies (R10 000 x 0/114) R     nil
Less: Input VAT on purchases to make zero-rated supplies (R7 000 x 14/114) (R   860)
Net VAT due to/(refundable by) SARS (R   860)

Exempt supplies

Exempt supplies are not subject to VAT. No output VAT, either at 14% or at 0%, is levied on exempt supplies. Input VAT incurred on expenses to make exempt supplies cannot be claimed against output VAT due to SARS.

Example 3:

  1. XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
  2. The inventories were sold for R10 000.
  3. All inventory sales are exempt supplies for VAT purposes.

Net VAT due to/(refundable by) SARS will be calculated as follows:

Output VAT levied on exempt supplies R nil
Less: Input VAT on expenses incurred to make exempt supplies (R nil)
Net VAT due to/(refundable by) SARS R nil

Combination of standard-rated, zero-rated and exempt supplies

Where a VAT vendor makes standard-rated supplies and/or zero-rated supplies and/or exempt supplies, input VAT must be apportioned in the same ratio as the three different types of supplies stand to each other.

Example 4:

  1. ABC Distributors made the following supplies for VAT purposes (VAT included where applicable):
Standard-rated supplies R  60 000   60%
Zero-rated supplies R  10 000   10%
Exempt supplies R  30 000   30%
Total supplies R 100 000 100%
  1.  Expenses incurred in the making of total supplies amounted to R85 000 (VAT included).

Net VAT due to/(refundable by) SARS will be calculated as follows:

Prorata Output VAT levied on standard-rated and zero-rated supplies[(60 000 x 14/114) + (R10 000 x 0/114)]Output VAT on exempt supplies   R7 368R      nil
Less: Apportioned input VAT on expenses to make standard-rated andzero-rated supplies [(R85 000 x 60% x 14/114) + (R85 000 x 10% x 14/114)]Less: Apportioned Input VAT on exempt supplies (R7 307)R      nil
Net VAT due to/(refundable by) SARS  R 61

Accounting software can be set up so that VAT is automatically recorded correctly for standard transactions. However, a computer programme will not be able to classify unique transactions for VAT purposes. Therefore it is still important that accounting staff is trained to handle VAT correctly, especially where grey areas exist.

If you would like more information about this topic, feel free to contact us for professional assistance and advice. 

This article is a general information sheet and should not be used or relied on as 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. 

Reference List:

  • VAT 404 – SARS Guide for Vendors

SARS VAT reviews and audits

It has become a common occurrence for vendors to receive a notice for a VAT review from SARS, which requires the vendor to submit supporting documentation in respect of a specific VAT201 return within 21 days. If the vendor fails to submit the supporting documentation, SARS may issue an additional assessment, disallowing the full value of the input tax claimed for that period. The vendor then needs to lodge an objection against this additional assessment and submit the necessary supporting documentation to substantiate the input tax claimed.

When a VAT return is submitted, that return is measured against certain pre-set risk factors on the computerised system of SARS. If certain parameters according to this system are exceeded, a review letter will be issued automatically by the system to the particular VAT vendor. No historical profile is maintained per vendor, and there is no limit on the number of review letters that can be issued. SARS can issue a review letter for each VAT period, even for periods where the vendor had made a payment to SARS.

During December 2011 SARS issued a number of limited scope audit engagement letters to various large companies, more specifically companies in the construction industry. The information requested was to be submitted within 21 days from the date of the engagement letters, which were issued between 12 and 20 December 2011. Many of the companies had already closed for the holidays, and had limited or no staff available.  Unfortunately the legislation provides no relief in this regard, except that the notice period should be reasonable. The engagement letters focused in particular on:

  • the VAT treatment of indemnity payments received;
  • bad debts recovered;
  • creditors older than 12 months on which an input tax deduction was claimed;
  • the sale of fixed assets;
  • input tax claimed on deductions relating to “motor car” and “entertainment” expenses; and
  • input tax claimed on supplies that are defined as “financial services”.

Regardless of the care taken by vendors to ensure the correct treatment of VAT claims, errors may still occur. Basic errors made by vendors include the claim of input tax deduction on the use of a rental vehicle for business trips, if that vehicle is a “motor car” as defined. Year-end functions and staff refreshments are defined as “entertainment”, and no input tax deductions may be claimed. It is only when these supplies are consumed or used to make taxable supplies, that a valid input tax deduction may be claimed.

Amongst others, SARS focuses on the correct VAT treatment of the following during the performance of an audit:

  • validity of VAT invoices issued and received;
  • zero rated sales;
  • employee benefits as defined in the Seventh Schedule of the Income Tax Act;
  • insurance claims received; and
  • sale of capital goods.

It is very important that the staff responsible for the keeping of the accounting records should be adequately trained and informed in this regard, and sufficient controls should be in place to avoid these errors.

This article is a general information sheet and should not be used or relied on as 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. 

SARS: Procedure to change banking details for a registered VAT vendor

A VAT vendor (an individual  or a business entity) has certain administrative duties in terms of the various acts applicable to VAT, one of which is to notify SARS when their registered business bank account changes. If a vendor does not notify SARS as required, a fixed-amount administrative penalty may be imposed by SARS. Fixed-amount penalties are based on the amount of the assessed loss/taxable income for the preceding year. 

Channels through which a change in banking details may be requested

Banking details for VAT can only be changed through the following channels:

  • In person at a SARS branch (preferred), assisted by a branch agent, and
  • Via eFiling.

SARS does not accept requests for change of banking details by telephone, fax, email, post or SARS dropboxes anymore. 

Persons allowed to request a change in banking details

Only the following persons may request a change in banking details and this person’s details must match the existing details on SARS’s records:

  • A representative who must be a natural person e.g. accounting officer, member of a close corporation, treasurer, partner, etc. and is registered as the official representative of the VAT vendor on the SARS system.
  • Only under certain exceptional circumstances:*
    • A tax practitioner who is registered with a controlling body and SARS and can present a valid power of attorney.
    • A person with a mandate e.g. bookkeeper, auditor, director, administrative officer of the tax practitioner, attorney, etc. A person with a once-off mandate must be linked to a tax practitioner in order to change the vendor’s banking details on E-filing.

    *Circumstances accepted by SARS as exceptional and which requires alternative/additional documentation to be submitted:

    • Vendor’s deceased estate
    • Vendor/representative vendor is incapacitated or terminally ill
    • Vendor is in prison
    • Business is under liquidation
    • Vendor is more than 200km from SARS branch
    • Representative vendor is temporarily outside RSA 

Documentation required for change in banking details

Table 1

The following documents must be submitted to SARS by the vendor/representative vendor requesting the change of banking details:

DOCUMENT DESCRIPTION DOCUMENT DETAILS
Vendor/Representative vendor
a) Identification:Valid original ID/temporary ID/passport/driving licence/asylum seeker certificate Original plus one certified copy
b) Proof of residential address (See Table 2 for list of documentation that SARS will accept as proof of residential address) See Table 2
c) Letter of appointment from the vendor if the request is received from representative vendor One original
Tax practitioner/Person with a mandate
d) Power of attorney One original
If VAT vendor is a company/close corporation
e) Memorandum of Incorporation (MOI) One copy
f) Proof of banking details:Not more than 3 months old and shows account holder’s legal name, account number, account type and branch code
  • Bank statement with original bank stamp on it, or
One original
  • ABSA eStamped statement, or
One original
  • If client opened a new bank account and has not received a bank statement yet:

Letter from the bank on bank letterhead with original bank stamp showing date on which bank account was opened

One original
g) Proof of physical business address of vendor (See Table 2 for list of documentation that SARS will accept as proof of physical business address) See Table 2

Table 2

SARS will accept any of the documents below as proof of residential address or physical business address:

DOCUMENT DESCRIPTION MAXIMUM AGE
1. Municipal account 3 months
2. Student fee account 3 months
3. Co-op statement (for farmers only) 3 months
4. Medical aid statement 3 months
5. Bond statement from bond holder 6 months
6. Telephone account 3 months
7. Licence for motor vehicle 1 year
8. Court order 3 months
9. Subpoena 3 months
10. Traffic fine 3 months
11. Documents for payout of pension or UIF 3 months
12. Life insurance policy document 1 year
13. Short-term insurance policy document 1 year
14. Health insurance policy document 1 year
15. Funeral policy document 1 year
16. Investment statement for shares or unit trusts 1 year
17. Current and valid lease/franchise contract N/A
18. Form CRA01 (Confirmation of Entity Residential Address):

  • To be completed if none of the above documents are available
  • If proof of residence is in the name of a third party:

A certified copy of the original third party’s ID/passport/driver’s licence OR temporary ID/passport/driver’s licence must be supplied

Not supplied

The above requirements may seem onerous, but SARS has a responsibility towards taxpayers to prevent unauthorised changes to their banking details, and SARS takes this responsibility very seriously.

This article is a general information sheet and should not be used or relied on as 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. 

Reference List:

  • VAT-MTD-05-G01 – Change of Banking Details for a Registered VAT Vendor

Nwanda internal news (March)

  1. Hawaiian Fun Day – 20 February 2015

Thank you all for attending our fun in the sun day at the Bedfordview Italian Club.

A big thank you extended to those who made time to arrange the day of fun and fantastic food.

  1. Awesome rewards:

Congratulations to the following staff: 

Newly qualified CA(SA):
Erika Botha

Successfully obtained their BCom(Acc) Degree:
Logan Adolph 

Passed with Distinction:
Denise Jubelius

  1. Baby bliss

Congratulations to Proff and Faith Mafela on the birth of their little baby girl – Princess Refilwe Mafela.

  1. New Home of Nwanda:

We have settled in at our shining new premises located at 28A Riley Road, Bedfordview.  Maps available: