Understanding VAT: Standard Rate, Zero Rate, and Exempt Supplies

/

As accountants, we often get questions from our clients about the different types of VAT rates and how they apply to their businesses.

In this post, we'll break down these concepts and explain when each rate is effective, how they affect your input VAT claims, whether you need to register for VAT if your business delivers zero-rated supplies, and the requirements for a VAT invoice.

Standard Rate

The standard rate of VAT is the default rate that applies to most goods and services. In South Africa, the standard VAT rate is currently 15%. This means that when you sell goods or services that are subject to the standard rate, you must charge your customers 15% VAT on top of the selling price. You can also reclaim the VAT you pay on business expenses related to these sales.

Example: If you sell office supplies for R1,000, you would charge an additional R150 (15%) as VAT, making the total amount R1,150.

Zero Rate

Zero-rated supplies are goods and services that are taxable but at a 0% VAT rate. This means that while you do not charge VAT on these sales, you can still reclaim the VAT you paid on business expenses related to these supplies. 

Zero-rated supplies typically include essential items such as basic foodstuffs, fuel, eggs, exports, and certain agricultural products like maize meal, milk etc.

Example: If you export goods worth R10,000, you will charge 0% VAT, so the total amount remains R10,000. However, you can still reclaim the VAT on expenses incurred to produce these goods.

Exempt Supplies

Exempt supplies are goods and services that are not subject to VAT at all. This means you do not charge VAT on these sales, nor can you reclaim the VAT you paid on business expenses related to these supplies. Common examples of exempt supplies include financial services, educational services, and certain healthcare services.

Example: If you provide educational courses worth R5,000, you do not charge VAT, so the total amount remains R5,000. However, you cannot reclaim the VAT on expenses related to providing these courses.

Impact on Input VAT Claims

If your business delivers zero-rated supplies (0%), you can still claim input VAT on the expenses incurred to produce these supplies. This is beneficial as it allows you to recover the VAT paid on your business inputs, even though you are not charging VAT on your sales.

However, if your business delivers exempt supplies, you cannot claim input VAT on the expenses related to these supplies. This means that the VAT you pay on your business inputs becomes a cost to your business, as you cannot recover it. 

It can get complex if your business delivers a combination of standard, zero and exempt supplies – so rather get advice in this case 😊

VAT Registration for Zero-Rated Supplies

Even if your business only delivers zero-rated supplies, you are still required to register for VAT if your taxable turnover exceeds the compulsory VAT registration threshold. 

In South Africa, the threshold is currently R1 million in any consecutive 12-month period. Voluntary registration is also an option if your turnover is below this threshold, which can be beneficial for reclaiming input VAT.

Requirements for a VAT Invoice

To claim input VAT, you must have a valid VAT invoice from the supplier. A VAT invoice must include the following details:

  • The words “Tax Invoice”, “VAT Invoice” or “Invoice”.

  • The name, address, and VAT registration number of the supplier.

  • The name, address, and where the recipient is a vendor, the recipient’s VAT registration number.

  • A serial number and the date of issue of the invoice.

  • An accurate description of the goods and/or services supplied.

  • The quantity or volume of goods or services supplied.

  • The value of the supply, the amount of tax charged, and the consideration for the supply (value and the tax).

When Are These Rates Effective?

The application of these VAT rates depends on the nature of the goods or services you provide.

It's essential to correctly classify your supplies to ensure compliance with VAT regulations. Here are some key points to consider:

  • Standard Rate: Applies to most goods and services unless specifically classified as zero-rated or exempt.

  • Zero Rate: Applies to specific goods and services listed in the VAT Act, such as exports and basic foodstuffs.

  • Exempt Supplies: Applies to goods and services explicitly exempted by the VAT Act, such as financial and educational services.

Understanding these distinctions will help you manage your VAT obligations more effectively and avoid potential penalties for incorrect VAT reporting. If you have any questions or need further assistance, please don't hesitate to contact us.