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Can you deduct input tax on promotional gifts? Here are 2 examples to help answer that

by , 17 March 2016
Generally speaking, SARS views input tax deductions for gifts and awards as entertainment, and they so won't allow it.

But there are exceptions to this, such as with promotional gifts!

That's right, SARS will allow you to claim input tax on promotional gifts in certain situations.

But be careful not to make a mistake, otherwise you could end up with unwanted penalties!

So take note of these 2 examples to help you understand when you'll be able to claim input tax on a promotional gift...

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If you claim input tax, your SARS VAT audit is impending
 
And when the SARS auditor comes knocking or sends a query, he'll check if:
 
·         Your books and records comply with the requirements of Section 55 of the VAT Act;
·         You didn't claim on exempt supplies;
·         Any of your claims were for non-taxable supplies;
·         You apportioned inputs correctly and at the right tax rate (Sections 16, 17 and 20 of the VAT Act);
·         And more!
 
But the truth is, even if you're entitled to your claim, but don't have the valid documentation, he'll still reverse your deduction!
 
Here's everything you need to secure every input tax claim you submit.

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Who's entitled to an input tax deduction?

In order for a business to qualify for an input tax deduction for entertainment, it must meet certain criteria. These include that:

·         The business must supply the entertainment in the ordinary course of its enterprise;
·         There must be a clear link between the good or service obtained and the entertainment supplied; and
·         The business must charge the customers or clients for the costs of the entertainment.
 

Example#1:

Ricky owns a store which rents out power tools.

At the end of every year, he supplies each of his top 5 clients with gift hampers consisting of dried fruit, nuts and beer.

Even though what he was doing involved a genuine promotional expense, the fact of the matter is that his business doesn't supply beer, dried fruit and nuts in its ordinary day-to-day functioning (it's not linked to his business in any way).

Also, the gift hampers are supplies for no consideration. In other words, he didn't charge the clients a price (consideration) with the intention of covering the costs of the entertainment supplies.

So he won't be able to deduct input tax here.
 

Example#2:

Fruity Salad is a business that provides fruit smoothies to customers.

Every time they open up a new store, they have a 'buy-one-get-one-free' promotion for 1.5 months, every Wednesday.

On the other hand, Fruity Salad will be able to claim input tax on their promotion.

This is because the promotion is part of a supply which the business normally provides during its ordinary course (it's linked).

IMPORTANT NOTE: Even though the promotion is a supply for no consideration, it's a 'bona fide' (genuine) promotion in that the supply is directly linked, in every way, to the entertainment the business normally provides.
 

*Page over to chapter G 02 in your Practical VAT Loose Leaf Service handbook to learn more on VAT relating to gifts and awards.

If you don't already have this indispensable resource, click here and order your copy today. 


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