If you're not sure how to account for Vat on a lease agreement, the Practical Vat Loose Leaf Service has an answer for you.
Here's the correct way to account for Vat on a lease agreement
#1: You must charge Vat on the full value of the agreement. This is basically the cost of the goods, including any finance charges or interest.
#2: The must pay Vat over to SARS in the tax periods that each periodical payment is made.
#3: If you're the lessee, you must claim the Vat paid as input tax, according to each periodical payment you make.
In this instance he doesn't require a tax invoice for each payment, but his original agreement will suffice, provided it contains the details and Vat number of the supplier and he can show the payments on his bank statements, says the Practical Vat Loose Leaf Service.
#4: If there's a residual value (a portion of the value which isn't financed in terms of the lease agreement), which is payable at the end of the lease period, that residual is seen as a separate supply for Vat purposes and must include its separate Vat portion.
Here's an example of how to account the right amount of Vat:
Mr K enters into an agreement with Kassies Copiers to lease a photocopy machine for 24 months. The agreement is signed on 31 January 2013.
The Vat is accounted for as follows by the two parties:
Kassies Copiers will pay output tax of R408 (R3 325 x 14/114) per month as he receives each payment. He will account for this in the Vat return starting with the January 2012 tax period and every tax period thereafter for as long as the lease is valid.
Mr K will claim input tax of R408 per month as he makes the rental payments. He will claim these amounts in his Vat returns starting with the January 2013 tax period and every tax period thereafter, for as long as the lease is valid.
Example: Cash cost of copier: R60 000
Finance charges: R10 000
Vat: R9 800
Total cost R79 800
Over 24 months = R3 325 per month, including Vat of R408.
Now that you know how to account for Vat on lease agreements, make sure you comply.