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Why Understanding The Subtleties Of VAT Is Vital

28 January 2010   (0 Comments)
Posted by: Author: Jana Botha
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Why Understanding The Subtleties Of VAT Is Vital

Confusing ‘zero-rated’ and ‘exempt’ tax terms can erode business profits

Tax Administrators often use the terms "zero-rated” or "exempt” interchangeably without appreciating that there is a fundamental difference. In fact, any incorrect classification could have a significant impact on a business’ profit margin, and may indicate weak internal corporate governance.

Due care must be exercised in respect of all transactions classified as exempt or zero- rated. Incorrectly classifying supplies will distort the computation of the recovery percentage, causing either too much or too little input tax to be reclaimed.

Both outcomes will harm the business, by either losing out on opportunities to recover input tax or exposing the business to the imposition of penalties and interest on an over-claim. Zero-rated supplies are taxable supplies subject to VAT at zero percent. A business may only recover from SARS input tax on expenses incurred in the course of making taxable supplies.

Exempt supplies are not taxable for VAT purposes and therefore do not form part of a business' VAT related enterprise.Exempt supplies include certain financial services, the supply of residential accommodation, certain educational services, and the transport of fare-paying passengers by road or rail. No input tax deductions may be claimed on goods or services acquired for the purposes of making exempt supplies.

Businesses making both taxable and exempt supplies must apportion shared expenses between taxable and exempt activities. They must develop and adopt a formal methodology to determine to what extent VAT is recoverable.

The impact of incorrectly classifying a transaction may also have significant cost implications in certain specialised industries,primarily the financial services industry. For example, the sale of a share in a company generally constitutes an exempt supply with no ability to recover VAT incurred (for example the costs of due diligence exercises). But if the supply is however made to a non-resident, it may qualify to be zero-rated and any input tax incurred will be recoverable. This may significantly affect overall transaction costs and could even be a deal maker/breaker.

Taking one's eye off the ball in this critical compliance area may damage the organisation or expose it to unnecessary risks. Good corporate governance requires a key focus in this area.

Source: By Jana Botha (Taxbreaks)


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