Accounting For All - (Chapter 4 Introduction To VAT)

CHAPTER 4
INTRODUCTION TO VAT
4.1 Introduction
When a business is registered for VAT, it must charge VAT on its sales (so called
output VAT), but can also claim the VAT paid on purchases back from the South
African Revenue Service (so called input VAT). The business must keep accurate
records of how much VAT the business is paying on purchases and charging on
sales. All VAT documents must be monitored and stored safely.
In this chapter we will give you some background information on VAT. This will
help you to understand how VAT is recorded in the business accounts.
Outcomes
You should be able to:
 Know who must register for VAT
 Distinguish between input and output VAT
 Calculate VAT payable to SARS (or due by SARS)
 Identify transactions where VAT is charged (output VAT)
 Identify transactions with zero-rated VAT
 Identify transactions of VAT exempt items
 Identify transactions where VAT is claimed back (input VAT)
 Calculate amounts excluding VAT, including VAT
 Calculate the VAT portion of an amount
 Calculate VAT where discount is involved
 Understand the legal implications of VAT.
4.2 What is VAT?

The VAT % in South Africa is 15%. It changed from 14% to 15% with effect
1 April 2018. This change was announced by the Minister of Finance in his 2018
Budget Speech in February 2018.
Copyright © 2018. Juta & Company, Limited. All rights reserved.
VAT stands for ‛value-added tax’. It is essentially a tax on the value-added

portion of sales.
VAT is an indirect tax on the consumption of goods and services in the economy.
If a business registers for VAT, this business becomes a vendor that acts as an
agent for the government in collecting VAT.
VAT is charged at each stage of the production and distribution process and it is
proportional to the price charged for the goods and services.
A vendor must charge VAT on all goods sold or services rendered. This amount
(the amount of VAT) is due to SARS, but this vendor can claim back all the VAT
which the vendor had to pay on goods or services.
Schutte, Madri. Accounting for All, Juta & Company, Limited, 2018. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/ujlink-ebooks/detail.action?docID=6483479.
Created from ujlink-ebooks on 2023-02-28 02:25:44.
Chapter 4 Introduction to VAT
All VAT charged on sales or services rendered is called output VAT (the goods
we sell go OUT of the business).
All VAT paid on purchases or for services received is called input VAT (the
goods come INTO the business).
The amount payable to SARS is then calculated by the difference of output VAT
and input VAT.
Let us illustrate with an example.
Mojani Traders bought inventory with a value of R3 000 and paid R450 VAT on
the purchases (15% × 3 000 = R450). (Total price including VAT = R3 450)
Mojani Traders then sold this inventory for R5 000 and charged R750 VAT on
the sales (15% × 5 000 = R750). (Total price including VAT = R5 750)
The amount that Mojani Traders has to pay to SARS is the output VAT of R750
less their input VAT of R450, which is R300.
In other words, Mojani Traders has charged R750 VAT on their sales, which is
due to SARS, but they can claim the amount that they paid when purchasing the
goods back from SARS, which was R450. That is why they owe SARS R300
(R750 – R450).
In summary: when a business sells goods which are liable for VAT, the VAT is
charged to the customer.
If the customer uses these goods in his business, then he can claim the VAT back.
The VAT charged on the sales invoice is called output VAT and the VAT claimed
back is called input VAT.
Note that VAT can never form part of the cost of an asset (fixed asset or
inventories) or cost where a business is registered for VAT.
That is because the input VAT is claimed from SARS and is accounted for as a
separate receivable (and not an asset or expense).
What is output and input VAT?

Output VAT: VAT charged on anything that goes out of a business. Includes sales
of goods and fixed assets.
Input VAT: VAT paid on anything that comes into a business. Includes purchases
of inventory and some fixed assets.
The difference between the output VAT and the input VAT is what is paid to or
received from the South African Revenue Service.
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Accounting for All
4.3 Registration for VAT

It is mandatory for a business (vendor) to register for VAT if the total value of
taxable supplies made in any consecutive twelve-month period exceeded
R1 million.
A vendor making taxable supplies of more than R50 000 per annum, but not more
than R1 million, may apply for voluntary registration.
A business that is not registered for VAT may not charge VAT on its sales. It
must, however, still pay VAT on its purchases, and cannot claim this VAT back.
Only a business registered for VAT may reclaim its input VAT. In other words,
only a business who is registered for VAT can charge VAT on its sales and claim
VAT paid on purchases back.
4.4 At what rate is VAT paid?

This depends on the nature of the item. Most items attract VAT at the standard
rate. This rate is set by the South African Revenue Service (presently 15%).
Goods on which VAT is charged at this rate are called standard rated.
 Zero rated – Some items such as exported goods and fuel attract VAT at a
zero rate – 0%. Zero-rated goods are still taxable but at a rate of zero. Certain
essential foods are also zero rated as a way of providing VAT relief for
people with low incomes.
 Exempt – Some items are exempt (excluded) from VAT, for example interest
on loans.
4.5 How to identify transactions where VAT is charged

The basic rule is that VAT should be charged at the standard rate on all supplies
of goods and services by a business registered for VAT (ie a registered vendor).
You should be aware of the exceptions to this rule. Certain items are exempt from
VAT or attract VAT at 0%.
The difference is important when you want to reclaim input VAT on purchases.
If you operate a concern that provides VAT exempt items such as rented
accommodation, you cannot reclaim the VAT (input VAT) paid on the purchases
used to operate the business. Since you cannot charge VAT you also cannot claim
VAT.
If you operate a concern that provides zero-rated goods such as petrol and certain
foodstuffs, you can reclaim VAT paid on your purchases.
This is the difference between VAT exempt items and zero-rated VAT items.
80
4.5.1 Examples of VAT exempt items

VAT is not charged on these items (and input VAT may not be claimed on
purchases used to supply them):
 Interest on loans, overdrafts, mortgage bonds
 Life assurance premiums
 Payments into medical aid funds
 Taxi, bus and train fares
 Salaries
 Donations
 Cash withdrawals by the owner
 Financial services
 Donated goods or services by an association not for gain
 Residential accommodation
 The letting of leasehold land
 The sale or letting of land situated outside the republic
 Transport of fare-paying passengers by road or railway
 The supply of educational and childcare services
 Membership contributions to employee organisations, such as trade unions.
4.5.2 Examples of zero-rated VAT items (19 basic food items)
VAT is not charged on these items (but you may claim the input VAT on
purchases used to supply these):
 Brown bread, brown bread flour, whole wheat brown bread (not rye or low
GI-bread)
 Maize meal  Pilchards in tins
 Rice  Eggs
 Dried beans  Dried mealies
 Vegetables  Milk
 Fruit  Cultured milk
 Samp  Dairy powder blend
 Vegetable oil, excluding olive  Milk powder

oil  Lentils
 Mealie rice  Brown wheaten meal
 Edible legumes and pulses of leguminous plants (peas, beans, peanuts)
Also:
 Fuel (petrol and diesel)
 Sale of a business
 International transport
 Municipal property taxes.
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Accounting for All
4.6 How to identify transactions where VAT can be recovered

The basic rule is VAT paid on purchases which are consequently used to provide
taxable supplies, can be recovered from the South African Revenue Service.
You should be aware of the exceptions to this rule, as noted in section 4.5.
Let us take a closer look at a VAT invoice.
A VAT (or tax) invoice should include both the VAT registration number of the
seller and the purchaser.
Mojani
MabasaTraders
Traders
16 PKings Road
O Box 987
Johannesburg
SELBY 2001
2000
Invoice Number : 123456
Tax Invoice
Date : 01/01/20X6
01/01/20xx
4548012360
Account Number : SM3365

112
J Smith Esq.
J Smith Esq. Telephone Number 011 432
(011) 2222
432 2222
Electromarket Ltd
Electromarket
112 Peters Road Ltd VAT Registration Number 4548012360
924 4614 29
112 Peters Road
Pretoria
1000
Pretoria
1000
Item Code Description Quantity Unit Price Net Amount
13679A Shoes 5 100.00 500.00

500.00
SALES VALUE (excl VAT) : 500.00

500.00
15%
VAT AT 14% : 75.00
70.00
AMOUNT PAYABLE (incl VAT): R 575.00

570.00
Terms: Payment is due within 30 days of invoice date
If you are a registered vendor, and you want to determine if VAT can be
reclaimed, you need to ask the following questions:
1. Is the document a VAT invoice?
A VAT invoice must include the following information:
 The words ‛tax invoice’ written on it clearly
 The supplier’s name, address and VAT registration number
82
 The invoice number and date

 A description of the goods or services supplied
 The quantity bought
 The total amount charged and an indication if it includes or excludes the
VAT amount.
2. Was VAT charged? If no VAT has been charged, the item may be exempt or
zero rated.
3. Is the VAT recoverable? The VAT on certain purchases (although not exempt
or zero rated) is not recoverable (cannot be claimed as input VAT).
The following cannot be claimed as input VAT:
 Food for use in a staff canteen
 Milk, tea, coffee, alcohol
 Motor cars
 Entertainment.
4.7 How to calculate VAT

 Calculate VAT from an amount exclusive of VAT
If a pair of genuine leather boots, imported from Italy, has a price before VAT of
R1 000 and VAT is to be added, then you simply multiply the price by the
standard rate (presently 15%).
VAT = R1 000 × 15% = R150
The total amount charged will then be:
R1 000 + R150 = R1 150 (amount including VAT)
 Calculate VAT from an amount inclusive of VAT
Suppose that you know the total price charged (the amount inclusive of VAT) and
you want to find out the price before VAT was added (exclusive of VAT). Do not
make the mistake of calculating 15% of the total price and then deducting this
amount as the VAT amount, which would be incorrect.
Let us see what happens when you do this.
R1 150 × 15% = R172.50
R1 150 – R172.50 = R977.50

However, we should get back to the original price of R1 000.
The correct way to calculate the amount, excluding VAT is to multiply the
inclusive amount by 100/(100 + VAT rate).
In our case, this is 100/(100 + 15) or 100/115
R1 150 × 100/115 = R1 000 which is correct (the amount excluding VAT).
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Accounting for All
You can also work out the amount for VAT if you use the formula 15/115. This is
called the VAT fraction.
R1 150 × 15/115 = R150, which is the VAT added.

Thus:
R1 150 (amount including VAT) – R150 (VAT) = R1 000 (amount excluding
VAT)
What is VAT inclusive and VAT exclusive?

VAT exclusive – No VAT has been added to the sales value.
VAT inclusive – VAT of 15% has already been added to the sales value.
To summarise:
If the amount is inclusive of VAT:
 To work out the original price (the amount excluding VAT), we use the
formula:
100
× amount
115 1
 To work out the amount of VAT added in a VAT inclusive amount, we use the
formula:
15 amount
115 × 1
If the amount is exclusive of VAT:

 To work out the amount of VAT, we use the formula:
15 amount
×
100 1
 To work out the amount inclusive of VAT, we use the formula:
115
× amount
100 1
4.8 Discount
If a business gives us a trade discount, cash discount or bulk discount, the
discount must be deducted before the VAT amount can be calculated. In other
words, VAT cannot be calculated on the discount amounts.
84
Example 4.1
Pretty Belinda sold goods to Alirah for R3 000 (excluding VAT). She gave Alirah
a trade discount of 5%. Calculate the value of the sales invoice.
Solution: R
Price of goods excluding VAT 3 000.00
– Trade discount @ 5% (150.00)
Amount after discount 2 850.00
VAT @ 15% on R2 850 427.50
Total amount including VAT R3 277.50
Example 4.2
Garth Enterprises sold the following items at the following amounts. Calculate the
VAT for each amount.
1. R10 000 excluding VAT
2. R10 000 including VAT
3. R1 700 including VAT
4. R25 000 excluding VAT
Solution: 15
1. R10 000 × 100 = R1 500
15
2. R10 000 × = R1 304.35
115
3. R1 700 × 15 = R221.74
115
15
4. R25 000 × = R3 750
100
Example 4.3
Mabonzi had the following transactions. Complete the table.
1. Sold inventory for R5 000 excluding VAT.
2. Purchased goods at R2 000 (excluding VAT), received a bulk discount of
12%.
3. Sold inventory for R12 000 including VAT.
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Accounting for All
Solution:
1. VAT = 5 000 × 15 = R750
100
12 15
2. [R2 000 – ( × 2 000)] × = R264
100 100
3. 12 000 × 15 = R1 565.22
115
Amount VAT Amount

excluding VAT including VAT
1. 5 000 750 5 750
2. 2 000 – 240 = 1 760 264 2 024
3. 10 434.78 1 565.22 12 000
4.9 Calculating VAT due to or receivable from SARS

The amount payable to SARS = Total output VAT – Total input VAT
 Output VAT = VAT on sales
 Input VAT = VAT on purchases.
If output VAT > input VAT = due to SARS
If output VAT < input VAT = due by SARS
Normally VAT returns are done in a two-month cycle period, depending on how a
business is registered for VAT at SARS. The two-month cycle will also depend
on the date of registration.
If, for example, a business was registered on 1 April for VAT, then the two-month
cycle will be as follows:
April Return and VAT payment should be at SARS on last business day of
May June (e-filing of return and payment via SARS e-filing or Electronic
funds transfer)
June Return and VAT payment should be at SARS on last business day of
July August (e-filing of return and payment via SARS e-filing or
Electronic funds transfer)
Aug Return and VAT payment should be at SARS on last business day of
Sept October (e-filing of return and payment via SARS e-filing or
Electronic funds transfer)
If return is not made by e-filing, then payment must be received by SARS by the
25th of the applicable month (or last preceding business day).
86
Suppose a business sells goods cash for R12 540 including VAT in a two-month
period. (periodic inventory system)
The business buys goods cash worth R10 260 over the same period (including
VAT).
What amount will be payable to the South African Revenue Service (SARS)?
To find the output VAT, multiply R12 540 by the VAT fraction:
R12 540 × 15 = R1 635.65,
115
Sales excluding VAT = R12 540 – 1 635.65 = R10 904.35
To find the input VAT, multiply R10 260 by the VAT fraction:
15
R10 260 × = R1 338.26
115
Purchases excluding VAT = R10 260 – R1 338.26 = R8 921.74
VAT payable = Output VAT – Input VAT

= R1 635.65 – R1 338.26
= R 297.39 → payable to SARS
NOTE: If the input VAT is higher than the output VAT, the difference represents
an amount receivable from SARS.
4.10 Recording VAT

Recording the sales and purchases transactions above in the general ledger:
Dr Sales Cr Dr VAT output Cr

Bank 10 904.35 Bank 1 635.65
VAT input
Bank 1 338.26
Bank Purchases
Sales 10 904.35 Purchases 8 921.74 Bank 8 921.74
VAT 1 635.65 VAT 1 338.26
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Accounting for All
 To calculate the VAT amount charged from an inclusive amount, multiply the
VAT inclusive amount by the VAT fraction, which is the VAT rate/100 + VAT
rate. VAT rate of 15%, the VAT fraction is 15/115.
 To calculate the output VAT, multiply total sales inclusive of VAT charged by
the VAT fraction.
 To calculate input VAT, multiply total purchases inclusive of VAT paid by the
VAT fraction.
88
Questions
Question 4.1
Customer Value of goods VAT Total invoice
sold (excluding amount (including
VAT) VAT)
Pierce R10 000
Anneh R25 000
Micke R50 000
Niche R18 000
Question 4.2
VAT) VAT)
Tobile R15 000
Beauty R12 000
Cyril R22 000
Question 4.3
VAT) VAT)
Princess R 200
Klaas R1 800
Question 4.4
Skolile Enterprises sell goods to Mobanju for R17 500. They give a bulk discount
of 2.5%.
Required:
Calculate the total amount of the invoice.
Question 4.5
Maleka sells goods to Princess with a catalogue value of R10 000. These goods
are subject to a trade discount of 25%.
Three weeks later Maleka sells goods to Precious with a catalogue price of
R17 000. The terms are: bulk discount 12%, cash discount 12%.
Required:
Calculate the VAT for both these transactions.
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Accounting for All
Question 4.6
The following transactions took place during January 2016 in the business of
A Amos. VAT of 15% is included in all prices where applicable.
2016
Jan 1 Sold merchandise on credit to C Carlos, R22 800 cost price (mark-up
10% on cost price).
2 A receivable’s debt of R2 800 must be written off.
3 Purchased stationery cash, R1 400.
4 Paid salaries for the month, R36 000.
Required:
4.6.1 Calculate the amount of VAT included in each transaction.
4.6.2 Indicate whether it is input or output VAT.
Question 4.7
The following transactions occurred during January 2016 in the business of
Dunlopp. VAT of 15% is included in all prices where applicable.
2016
Jan 1 Cash sales according to cash register roll, R3 000.
2 The owner borrowed R7 000 from Union Bank and deposited the cash
in the current account of the business.
3 Purchased merchandise on credit from Firestone, R2 350.
4 A receivable Zala’s debt of R300 must be written off as irrecoverable.
5 The owner withdrew R600 cash to pay his private telephone account.
6 Received a credit note from Firestone for damaged goods returned,
R350.
7 The bank charges on the bank statement amounted to R75.
Required:
Calculate VAT for each transaction.
90
Question 4.8
Indicate the effect of the following transactions on the accounting equation using
the following columns:
No Subsidiary Acc Acc Amount OE A L

journal debit credit
The business is using the perpetual inventory system. VAT of 15% is included in
all prices where applicable (calculate to two decimals).
1. Purchased merchandise cash from Rambo Suppliers, R15 700.
2. Purchased equipment on credit from Expo Office Outfitters, R28 400.
3. Sold goods on credit to P Swan, R8 400. Cost price R6 140.35.
4. Received R1 500 from S Dube as payment for the month’s rent of an office
space.
5. Received R950 from a receivable, G Rabe, in full settlement of his debt of
R1 000.
6. The owner took goods at cost price to the value of R800 for his own private
use.
7. A receivable R Zwane’s debt of R1 200 must be written off as irrecoverable.
8. Received a credit note from Expo Office Outfitters for damaged equipment,
R7 500.
9. Cash sales, R2 700. Cost price, R1 973.68.
10. Charged a receivable’s overdue account of R1 800 with interest at 16% pa
for three months.
Question 4.9
Show the effect of the following transactions on the accounting equation by using
the following columns (show the amounts):
No Acc debit Acc credit Amount OE A L

The business uses the perpetual inventory system. VAT of 15% is included in all
amounts where applicable. A mark-up of 20% on cost price is maintained (all
calculations to the nearest R).
1. Purchased merchandise on credit from C Zikwe, R11 400.
2. Cash sales, R22 800.
3. Donated R5 000 to the local Red Cross.
4. The owner took inventory for own use. Cost price of R650.
5. A receivable’s debt of R600 must be written off as irrecoverable.
91

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CHAPTER 4

4.2 What is VAT?

VAT stands for ‛value-added tax’. It is essentially a tax on the value-added

What is output and input VAT?

4.3 Registration for VAT

4.4 At what rate is VAT paid?

4.5 How to identify transactions where VAT is charged

4.5.1 Examples of VAT exempt items

 Vegetable oil, excluding olive  Milk powder

4.6 How to identify transactions where VAT can be recovered

Account Number : SM3365

Item Code Description Quantity Unit Price Net Amount

13679A Shoes 5 100.00 500.00

SALES VALUE (excl VAT) : 500.00

AMOUNT PAYABLE (incl VAT): R 575.00

Terms: Payment is due within 30 days of invoice date

 The invoice number and date

4.7 How to calculate VAT

R1 150 – R172.50 = R977.50

In our case, this is 100/(100 + 15) or 100/115

R1 150 × 100/115 = R1 000 which is correct (the amount excluding VAT).

R1 150 × 15/115 = R150, which is the VAT added.

What is VAT inclusive and VAT exclusive?

If the amount is exclusive of VAT:

 To work out the amount inclusive of VAT, we use the formula:

Amount VAT Amount

4.9 Calculating VAT due to or receivable from SARS

VAT payable = Output VAT – Input VAT

4.10 Recording VAT

Dr Sales Cr Dr VAT output Cr

No Subsidiary Acc Acc Amount OE A L

No Acc debit Acc credit Amount OE A L

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