Basics of VAT

In this series of articles, Cameron Kotze – the Tax Partner at Ernst and Young – discusses some topical tax issues for our readers.

VAT is an ‘indirect tax’. This means that the person who carries the cost of the tax is assessed indirectly through the taxation of the transactions into which he or she enters and not by the Receiver of Revenue is as the case for income tax.The essence of a VAT system is that all transactions entered into by a person are subject to VAT.A seller in a transaction who is VAT registered, will charge and collect output tax.The purchaser, irrespective of his or her identity, will be charged and have to pay VAT to a person who is registered for VAT.This is commonly referred to the purchaser’s input tax.The difference between a VAT registered person’s output tax and input tax is essentially the tax on the value added by the person as purchases are converted to sales.The net difference between the output tax and input tax is paid to the Receiver of Revenue or claimed back from the Receiver of Revenue at the end of each tax period.The Receiver of Revenue gets the net tax from the penultimate seller that sells to customers who are not VAT registered.These customers cannot claim any input tax in respect of their purchases because they are not VAT registered.For those of us that are not VAT registered, it is straightforward.We cannot charge VAT to anyone when we sell something but still have to pay VAT when we buy things.VAT is essentially an inclusive tax and any price charged is deemed to be inclusive of VAT.Prices quoted on price tags, catalogues, contracts or advertisements must include tax and, if the seller is VAT registered, must be accompanied by a statement that the price is inclusive of tax unless the price is clearly broken down into net consideration, tax and the total consideration.So, even if you are not VAT registered and you sell your old car, you will try and recover as much as possible of the original purchase price – effectively your selling price includes a VAT component as you endeavour to recover as much as possible in respect the amount paid for your old car.On the basis that the purchaser of your old car is a VAT registered car dealer, he or she will be entitled to a deemed input tax credit.Even though you recovered no VAT when you sold your car, your selling price is deemed to include VAT and therefore the dealer can claim an amount in respect of the price paid to you to buy the car.This amount is calculated by applying the standard rated tax fraction to the consideration paid to you and claiming it in his or her VAT return.The standard-rated tax fraction is 15/115 due to the fact that our standard rate of VAT is 15 per cent.Only VAT registered people can claim VAT and therefore the deemed input VAT credit concept can only be used by VAT registered persons.VAT operates on a ‘tax period’ basis.All out put tax charged and all input tax paid in a tax period comes into the same tax return.It is not necessary to’ match’ inputs and out puts when completing a VAT return.The effect of a VAT system on the average business is that tax is first paid out to suppliers and then recovered as a refund or credit from the Receiver of Revenue.Payment of the tax poses a short-term cash flow problem and is not an absolute cost.Many people fail to grasp why this payment-and refund cycle must take place but it is the essential to the proper working of the system.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.This means that the person who carries the cost of the tax is assessed indirectly through the taxation of the transactions into which he or she enters and not by the Receiver of Revenue is as the case for income tax.The essence of a VAT system is that all transactions entered into by a person are subject to VAT.A seller in a transaction who is VAT registered, will charge and collect output tax.The purchaser, irrespective of his or her identity, will be charged and have to pay VAT to a person who is registered for VAT.This is commonly referred to the purchaser’s input tax.The difference between a VAT registered person’s output tax and input tax is essentially the tax on the value added by the person as purchases are converted to sales.The net difference between the output tax and input tax is paid to the Receiver of Revenue or claimed back from the Receiver of Revenue at the end of each tax period.The Receiver of Revenue gets the net tax from the penultimate seller that sells to customers who are not VAT registered.These customers cannot claim any input tax in respect of their purchases because they are not VAT registered.For those of us that are not VAT registered, it is straightforward.We cannot charge VAT to anyone when we sell something but still have to pay VAT when we buy things.VAT is essentially an inclusive tax and any price charged is deemed to be inclusive of VAT.Prices quoted on price tags, catalogues, contracts or advertisements must include tax and, if the seller is VAT registered, must be accompanied by a statement that the price is inclusive of tax unless the price is clearly broken down into net consideration, tax and the total consideration.So, even if you are not VAT registered and you sell your old car, you will try and recover as much as possible of the original purchase price – effectively your selling price includes a VAT component as you endeavour to recover as much as possible in respect the amount paid for your old car.On the basis that the purchaser of your old car is a VAT registered car dealer, he or she will be entitled to a deemed input tax credit.Even though you recovered no VAT when you sold your car, your selling price is deemed to include VAT and therefore the dealer can claim an amount in respect of the price paid to you to buy the car.This amount is calculated by applying the standard rated tax fraction to the consideration paid to you and claiming it in his or her VAT return.The standard-rated tax fraction is 15/115 due to the fact that our standard rate of VAT is 15 per cent.Only VAT registered people can claim VAT and therefore the deemed input VAT credit concept can only be used by VAT registered persons.VAT operates on a ‘tax period’ basis.All out put tax charged and all input tax paid in a tax period comes into the same tax return.It is not necessary to’ match’ inputs and out puts when completing a VAT return.The effect of a VAT system on the average business is that tax is first paid out to suppliers and then recovered as a refund or credit from the Receiver of Revenue.Payment of the tax poses a short-term cash flow problem and is not an absolute cost.Many people fail to grasp why this payment-and refund cycle must take place but it is the essential to the proper working of the system.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.