Company A is a VAT vendor which pays for the entertainment expenses for its subsidiary, Company B. The tax invoice is made out to Company A for R11 400 (R10 000 + R1 400 VAT).
At the end of the month, company A recovers this entertainment cost from Company B, as it's Company B's expense.
Now, for VAT purposes, the recovery of this cost is as follows:
. Company A pays the tax invoice, because the supplier issues the tax invoice in Company A's name. But company A can't claim the R1 400 input tax because input tax is denied on entertainment. So then, Company A's cost is R11 400.
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2. Company A then gives a tax invoice to Company B for the R11 400 plus R1 596 VAT. The description on the tax invoice is now 'management fee'.
Company B can claim the R1 596 as input tax because there are two supplies made here, with the first one being the supply of entertainment to Company A and the second one being the management fee from Company B.
Company B now claims input tax, not on entertainment, but on the supply of a taxable service, which is a management fee in this case. This is irrespective of how Company B allocates this amount within its books.
But now, if for example, Company A acted as an agent of Company B in terms of an agent and principal agreement, it doesn't claim input tax or levy output tax. Company B will pay Company A the full tax invoice value of R11 400 so that Company A will not have lost money in the transaction. But Company B can't claim the VAT of R1 400 as input tax because it relates to entertainment. Company A won't issue a tax invoice to Company B here, but rather a statement to recover the payment it made on Company B's behalf.
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