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Here's how to deal with the Vat on a deposit for goods
A deposit becomes a consideration if it becomes part of the total payment or your client forfeits it and you keep it. If this happens, you, as the supplier, have to calculate Vat
You must pay output tax
on the deposit or the part of it that you applied as payment. If your client forfeits part of it, apply the tax
fraction (14/114). This is unless you charged Vat
on the deposit, in which case you will pay the full 14% to SARS.
But if the deposit payment falls under a lay-by agreement with you and your client (on a supply of goods for R10 000 or less) it only becomes a consideration if the client cancels or terminates it. In this case you must pay output tax
But what about a deposit for a service? Does that have the same Vat
Here's how to treat Vat on a deposit for a service
A service counts as 'work you've done or are going to do'. This has an entirely different Vat
treatment all together.
This means you might not have to pay Vat
at all. This is until you apply the amount of the deposit towards payment of part of the contract amount (or if you forfeit it).
Here's an example to help explain:
Mat owns Matt's Cupboards and registered for Vat
. His customer, Chris, wants Matt to design and install cupboards for him (this is a service). Matt wants a deposit to secure the supply of the goods. He'll hold this in trust until Chris gets the cupboards. Chris pays the deposit in September.
When Matt finishes the job in November, Chris must give him the full payment. There's the possibility though that Chris may cancel his order before the cupboards are ready for delivery. If he does this he'll claim his deposit back.
But Matt's tax
period ends 30 September. So what's Matt's Vat
In terms of their agreement the deposit was to secure the goods. It's also refundable under certain conditions. At the time of the agreement, therefore, it's not 'consideration'. This means there's no Vat
on the deposit if Chris claims it back.
But when it becomes part of the full payment it becomes consideration. This means Matt must declare and pay the Vat
on the full amount, including the former deposit.
As I said at the start of this article, Vat
on deposits is rather confusing and there's a lot more you need to know about it. You can find all the information you need in the Practical Vat Loose Leaf Service