Many businesses worry about having to suddenly ‘pay VAT’ by reaching the compulsory VAT registration threshold without properly understanding what VAT registration is. VAT is a tax present on almost all goods and services we buy and sell in South Africa daily, regardless of our registration status. It is not something additional that suddenly applies to you if you pass the threshold.
Instead, VAT registration allows you to ‘pass on’ the VAT burden you would normally absorb as part of your cost of doing business and claim back the VAT you pay to make your goods/services. These two figures are set against each other. So you can either receive a VAT refund or may have to pay over the net VAT due if you have already benefited from paying less VAT through the period. While there is a little extra administration involved in being VAT registered, it is often to the net benefit of the vendor, not an added burden.
However, some types of business are VAT-exempt. There is also a wider category of goods and services that do not generate VAT on the end user. Today, we look at these in more detail.
How To Apply For VAT Exemption
You are a VAT-exempt business in South Africa if you produce only VAT-exempt items. These are mostly:
- Educational services
- Residential rent
- Public road/rail transport
- Financial services that do not generate fees
Most companies that produce zero-rated VAT items will still register for VAT, as they can claim a refund on the VAT they pay to produce the goods.
You would only need to worry about proving your VAT-exempt status if your business reaches the compulsory threshold (1 million rand in taxable turnover in a consecutive 12-month period), at which point you will submit supporting documents to SARS proving you only handle VAT-exempt products despite that turnover. No one else is required to prove VAT exemption.
Who Is Exempt From Paying VAT In South Africa?
Strictly speaking, no one is ‘exempt’ from paying VAT in South Africa. VAT is a form of taxation applied to most goods and services, so people across all sectors of the economy pay VAT daily, often without even realizing they are doing so. What you can be exempt from, however, is the need to register as a VAT vendor and declare your VAT inputs and outputs directly to SARS. This will never apply to natural persons, who simply have to pay VAT on the goods/services they purchase. It is available to business concerns (including sole proprietorships) only.
The only concerns that have to register for VAT with SARS are those making over R1,000,000 of taxable turnover in a 12-month consecutive period. However, many businesses make a voluntary registration once they pass R50,000 in taxable turnover in the same period so they can leverage the benefits of being a VAT-registered vendor- namely, the ability to pay only a net excess (or receive a net return) on their overall VAT transactions. This often opens doors to becoming vendors and suppliers to VAT-registered companies, who typically do not want to trade with those who are not VAT-registered, as it impacts their own ability to claim back VAT inputs/outputs and thus negatively affects their income flow.
It’s worth noting that a business that meets that turnover amount can be classed as ‘VAT exempt’ if it only produces vat-exempt goods or services. A good example of this would be an educational institution. Typically, businesses producing zero-rated items still register for VAT, as they are in the unique position where they can still claim input VAT that goes into making the goods and often receive VAT refunds.
How Do I Know If Something Is VAT-Exempt?
If you are dealing with a VAT-registered company that also produces some VAT-exempt items, you will see this stated on their invoice. Items that attract VAT will have the VAT-exclusive and VAT-inclusive amounts listed. Zero-rated or VAT-exempt goods will appear with no VAT added to the final amount.
However, as most goods and services in South Africa are not VAT-exempt, and most purchasers are not VAT-registered entities, there’s no real legislation compelling a clear difference to be stated. It can be implicitly assumed that if you are purchasing a VAT-exempt product, there is no VAT involved in its pricing. Remember that South Africa is not like the United States, where shops and vendors only display a VAT-exclusive amount and add the VAT amount at the till. Instead, South African businesses are required to display ‘the price you pay’ at all points, which makes it much easier to budget and understand what you are paying.
In general, VAT-exempt items are those which provide essential services and goods to South Africans, especially the poorest of the poor. This includes a list of basic food items, as well as things like essential medical services, educational services, and certain types of financial services. These items are exempt to reduce the effects of taxation on vulnerable populations.
How Do I Become Tax Exempt In South Africa?
Before we look at tax exemption in South Africa, let’s just reiterate that tax exemption refers to being exempt from paying income tax as a business. It is not specific to VAT, and as we’ve looked at above, there is no real ‘VAT exemption’ available. There are simply businesses that are not VAT registered and thus cannot ‘pass on’ the VAT burden down the supply line and have to pay it at every transaction point, and then there are businesses with a high enough turnover to claim back (or pay over) portions of their VAT to SARS as a holistic whole, instead of simply ‘eating’ the cost at every point in their supply and demand chains.
Tax exemption in South Africa is offered to specific types of organizations that are seen to act for the betterment of society or which do not generate a meaningful ‘product’ from their existence but which may handle money as part of their existence. This includes Public benefit Organizations, recreational clubs, memberships/professional bodies, homeowners’ associations, public institutions, and entities helping small businesses acquire funding. Some of these are automatically tax-exempt. Others may have to apply for an income tax number and their tax-exempt status as a formality.
You can find out more about tax-exempt entities from SARS directly here.
What Is The Difference Between Zero-Rated And Exempt VAT?
At first glance, there seems to be no difference between zero-rated and exempt VAT items. Neither allows for VAT to be charged on the end goods or services. However, there is a critical one that all businesses should understand:
- If an item is Zero-Rated for VAT, this means that you cannot charge VAT on the end product. However, you can still claim the VAT inputs that went into creating the product, and this could generate a VAT refund on your products.
- If an item is VAT-exempt, on the other hand, no VAT can be charged in either direction. You cannot charge VAT on the end product, nor can you claim input VAT for its creation.
Vat exemption may seem tricky on the surface, but it is actually a surprisingly easy (and rather niche) area of being in business in South Africa.
