What is VAT and how does it work ?

A detailed explanation on the different types of VAT and their impact. We delve into when and how to claim as well as details for a valid tax invoice.


Types of VAT:

– Standard rate
– Zero-rated supplies
– Exempt


Standard Rate

VAT is calculated at 15% of the service or goods total and then added onto the service/goods total.

• Output VAT:

– When a company or an individual generates a sale or fee, it is considered Excluding VAT, and VAT is calculated on this revenue and then added onto it.
– The VAT Inclusive amount is considered, taxable goods – for VAT purposes. For INCOME TAX, the nett / Exclusive amount is recognised as revenue/sales/fees.
– This is the amount shown on the VAT201.
– Output VAT is what is owed to SARS.
– When the debtor/customer/client pays their account, you allocate the entire receipt against their account, BUT the VAT portion, belongs to SARS and is due to SARS from the moment the invoice amount becomes receivable.

• Input VAT:

– Input VAT is VAT payable to service providers and suppliers as part of their invoice total.
– Input VAT is calculated and claimed on the following :
• General expenses (with limitations)
• Capital goods purchased (with limitations)
– Therefore, when payment is made on an invoice (or at the till a shop or supermarket), the total amount paid, includes the VAT portion
– Input VAT is deducted from the Output VAT declared, in order to determine the final VAT balance owing to SARS

When are goods exempt from VAT and when are they zero-rated? Why are they zero-rated or exempt?

Both exempt and zero-rated items may have a 0% rate on your accounting software, but the difference needs to be understood. It is also important to know that just because the items are zero-rated or exempt from VAT, it does not mean the items are not taken into account for income tax.
Input VAT cannot be claimed on fuel or interest paid, but should these be business expenses, the expense can be claimed for income tax. Should a service or sale, to a foreign business be invoiced, there is no VAT being charged, but the income is taxable for income tax.


The most popular items are:

• Sales or services to foreign countries.
• Basic food items:

– Brown bread.
– Milk.
– Fresh paprika (dried paprika has VAT).
– Agricultural goods: maize, corn, dried mealies, etc.
– Fuel.

The idea behind basic food items not carrying VAT, is to make these items more affordable for households, with lower incomes. Farmers are also able to obtain/purchase seeds, etc at a zero rate.


Also at a rate of 0%, but consists of the following items:

• Finance services (excluding bank fees):

– Interest.
– Long-term insurance.

• 3rd party companies or individuals who earn commission on the sale of policies can register for VAT and will have to register for VAT if their revenue exceeds R1million.
• See Section 2(1) of the VAT Act

• School fees.
• Public transport.
• Residential accommodation.

– The landlord cannot charge VAT or claim VAT on services (commission to agents, repairs, etc.).– Needs to pay the VAT, but cannot claim it from SARS.

– This excludes B&B’s, hotels and other relevant accommodations, where the accommodation is a service and not for a primary residence.


Expense and capital items purchased:

When can and when can we not claim input VAT?

1) When the service provider / supplier is NOT registered for VAT.
2) When the service or goods is either :
i.  Zero-rated
ii. Exempt
3) When VAT is strictly not allowed :
– Petrol and diesel 
i. There are exceptions, but rule-of-thumb is NO VAT may be claimed.
 – Staff welfare and refreshments
i. Water for the water cooler
ii. Tea, coffee, milk, sugar, etc
iii. Fast foods when traveling
– Entertainment 
i. Taking clients or staff out or for office consumption
ii. The exceptions here are when the company/individual earns commission or is strictly in specific industries
– Goods purchased from foreign countries :
i. The exception :
There may be customs VAT on the invoice which is at a higher rate than 15%


Input VAT on Capital Goods: 

Capital goods are generally a single item with a value of over R7,500 (excl. VAT).
– Eg. Seven chairs at R1,500 each totals: R10,500. Individually, they are not considered.
They can still be shown on an asset register, but then fully written off.
Input VAT on capital goods is disclosed separately on the VAT201 and is added to the Input VAT as mentioned above.
When can Input VAT NOT be claimed on capital goods?
1) When the service provider / supplier is NOT registered for VAT.
2) Vehicles :
– Double cab bakkies
– 4-door passenger vehicles (with exceptions)
– Mini-busses (with exceptions)
These are the most common, general examples.


Information needed for valid invoice:

There is quite a bit of information needed, on an invoice, to make it a valid tax invoice. Without the below, your VAT claim will be dismissed and your VAT liability will increase:

1) Details for both supplier and purchases :
– Full company names (or an individual’s name and surname)
– Addresses
– VAT numbers
– Contact details are a bonus, but not a strict requirement.
2) Other details on the invoices :
– Date on which the invoice is issued
– Clearly be shown how the pricing is calculated
– Exclusive amount must be clearly stated
– VAT percentage and amount must be clearly shown
– Inclusive amount must be shown

3) Description of services / goods to be clearly shown as well as whether calculated price already Includes or excludes VAT. This relates to individual line-items and separate descriptions within the body of the invoice.

– Salim Khan

The ins and outs of VAT registration

Mandatory registration must be done within 21days of exceeding R1million. Voluntary registration has been made easier with some additional rules.


Sales less than R1million, but more than R50,000 for the past 12months.

  • Trade has been longer than 2months, but not more than 11months, then the average of R4,200 of trade, for the preceding months. Example: if total earnings, for 5months were R25,000, then in month 6, you can register for VAT.
  • Trade for one month exceeds R4,200, voluntary registration can be done.

If no revenue has been generated, then there are 3 options available:

1. Contract stating that more than R50,000 will be made in the next 12months.   

  • As per a SARS branch manager, there must be full detail on the contract : Supply volumes, details of supplies/services to be rendered as well as the agreed upon price.
  • Signatures of both parties and preferably on the taxpayer’s customer’s letterhead.

2. Financial agreement with a bank, credit provider, non-resident or any other authority, where repayments in the following 12months will exceed R50,000.

3. Where expenditure – expense or capital in nature – will, or has, exceeded R50,000. As per a SARS branch manager : For capital goods, an on-site inspection will have to be done.


Even though registrations can be done via e-filing, the following documents will be required (however this will most probably vary based on the branch you visit as well as the type of registration):

  • Power of attorney (for tax practitioners).
  • Resolution passed where the company representative – as per the power of attorney – has indeed been appointed as the representative. YES, even it is one director.
  • Company registration docs – Official Company Disclosure from CIPC will suffice (latest).
  • Certified ID’s for all directors ( no older than 3months).
  • Proof of address for directors and entity.
  • Branches and call centre vary on this:

– Letter from the bank confirming details and/or
– 3 months bank statements.

  • Proof for the type of registration:

– Invoices to customers (and the bank statements to correspond).

– Written contracts.

– Finance agreement and proof of purchases.

An issue that occurs quite frequently is where a newly founded company – most of the time for the purpose of – wants to apply for a tender, but requires a VAT number in order to do so. This becomes quite complicated as none of the rules can be applied to a “maybe” or a possible income stream. This is an area where, we believe, tax authorities need to have a look on special conditions and/or terms.

– Salim Khan