Key Concepts (Grade 12 NSC Matric Accounting): Revision Notes
Key Concepts
What is Value Added Tax (VAT)?
Value Added Tax, commonly known as VAT, is a type of tax that the government charges on goods and services when they are sold. In South Africa, VAT is currently set at a standard rate of 14%. This tax plays a crucial role in generating revenue for the government, which is then used to fund various government services and expenditures that benefit society.
When you purchase items at a shop, the VAT is usually already included in the price you see on the shelf. This means that consumers are ultimately the ones paying this tax, even though businesses are responsible for collecting it.
VAT vendor registration
Who must register as a VAT vendor?
Understanding when a business needs to register for VAT is essential for any entrepreneur or business owner.
Compulsory registration applies to all businesses whose annual turnover exceeds R1-million. This means that once a business reaches this threshold, it has no choice but to register as a VAT vendor with the South African Revenue Service (SARS).
Voluntary registration is available for smaller businesses with turnover below R1-million. These businesses can choose whether they want to register for VAT or not, depending on their specific circumstances and business strategy.
Benefits of VAT vendor registration
The primary advantage of becoming a VAT vendor is that businesses can reclaim the VAT they pay when purchasing goods and services for their business operations. This is known as claiming back VAT input, and it can significantly reduce the actual cost of business expenses.
VAT Recovery Example:
If a business buys office equipment worth R11,400 (including VAT), they can claim back R1,400 (the VAT portion) from SARS, making their actual cost only R10,000.
Calculation:
Items not subject to VAT
Not all goods and services are treated the same way under the VAT system. There are two important categories to understand:
Zero-rated items
Zero-rated items are charged at 0% VAT, but this rate can be changed by the government at any time. Common examples include:
- Fresh fruits and vegetables
- Brown bread
- Milk
- Maize and rice
- Cooking oil
These items are typically basic food necessities that the government wants to keep affordable for all citizens.
VAT-exempt items
VAT-exempt items are completely excluded from the VAT system. No VAT is charged on these items at all. Examples include:
- Interest charges on loans
- Export services
- Educational services
- Childcare services
Understanding VAT input and output
These two concepts are fundamental to how VAT works for businesses:
VAT input
VAT input refers to the VAT amount that a business pays when it purchases goods and services for its operations. The good news for VAT-registered businesses is that they can claim this amount back from SARS. Think of it as VAT that flows into the business's expenses but can be recovered.
VAT output
VAT output is the VAT amount that a business collects from its customers when selling goods or services. This money doesn't belong to the business - it must be paid over to SARS. Think of it as VAT that flows out of the business to the government.
How VAT works in practice
When a VAT-registered business operates, it essentially acts as a tax collector for the government.
Worked Example: VAT Collection Process
The business follows this process:
Step 1: Collects VAT from customers (VAT output)
Step 2: Pays VAT on business purchases (VAT input)
Step 3: Claims back the VAT input from SARS
Step 4: Pays the VAT output to SARS
This system ensures that VAT is ultimately paid by the final consumer, while businesses serve as intermediaries in the collection process.
Key Points to Remember:
- VAT is currently charged at 14% on most goods and services in South Africa
- Businesses with turnover over R1-million must register for VAT (compulsory)
- Smaller businesses can choose to register voluntarily if it benefits them
- VAT input can be claimed back from SARS, while VAT output must be paid to SARS
- Some items are zero-rated (0% VAT) while others are completely VAT-exempt
- VAT registration allows businesses to recover the VAT they pay on business expenses