There may be instances where you will not be able to charge output tax on the goods or services you sell, nor will you be able to deduct input tax for the expenses you incur. Let us better understand zero-rated and exempt supplies.
Zero-rated is when you charge 0% VAT on your tax invoice. Should you decide to export your products using direct export (this is when you assume responsibility for delivering the goods to the buyer in another country) – your product is then classified as a zero-rated product.
Note that zero-rated supplies are still considered ‘taxable’. Even though you are charging 0% VAT on the item, meaning you collect no output tax, you are still allowed to claim back the VAT you incurred (input tax) on goods or services acquired in the course of making such taxable supplies. It gets a little tricky so you may want to read that bit again.
Our government applies a zero-rating to certain goods and services, like basic food items, to bring down the living expenses of lower-income households.
The exempt classification is when goods or services are not considered a taxable supply.
While the net effect on your customer’s invoice is the same (you do not add VAT), selling an exempt supply has one notable difference: you are not permitted to claim the VAT you paid (input tax) to develop your product or service. Basically, if your business only sells exempt supplies, you will not be allowed to register for VAT.
Other examples of VAT-exempt goods and services include non-fee-related financial services, educational and training services, charitable fundraising events, residential rental accommodation, and the selling, leasing, and letting of commercial property.
When to register for VAT
The VAT law only requires businesses to register for VAT if the taxable supplies made or to be made, is over R1 million in any consecutive twelve-month period.
However, there are certain instances where you may opt to register for VAT. The only requirement to do so is that taxable supplies made in the past period of twelve months must exceed R50 000.
Some reasons you may consider voluntarily registering as a VAT vendor:
- Your business sells mostly zero-rated supplies. Remember that you will still be able to claim back the VAT on the standard-rated supplies you buy to make your zero-rated product or service. And with no output tax, you may qualify for a VAT refund from SARS.
- Large capital expenditure is necessary. If your business needs a substantial deposit for production, being a VAT vendor means you can claim back the VAT charged on the big-ticket production items.
While there are many cloud-based accounting solutions that can help you keep track of your finances, an accountant can identify blindspots as well as ways to save money and cut costs.