This example reveals that you need to know about Vat and the recovery of costs
Company A is a Vat
vendor and pays for the entertainment expenses of its subsidiary, Company B.
invoice is made out to Company A for R11 400 (R10 000 plus R1 400 Vat).
At month end, Company A recovers this entertainment cost from Company B (as it is Company B's expense).
Keep in mind that for Vat
purposes, the recovery, or on-charge of this cost is as follows:
1. Company A pays the tax
invoice, as the supplier issues the tax
invoice in Company A's name. But Company A can't claim the R1 400 input tax
, as input tax
is denied on entertainment. So Company A's cost is R11 400.
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2. Company A then issues a tax
invoice to Company B, for the R11 400 plus R1 596 Vat
. The description on the tax
invoice is now 'management fee'.
3. Company B can claim the R1 596 as input tax
. The reason for this is there are two supplies made here.
The first one is the supply of entertainment to Company A, and the second supply is the management fee from Company B.
4. Company B now claims input tax
, not on entertainment, but on the supply of a taxable service (in this case, a management service). This is irrespective of how Company B allocates this amount in its books.
But, 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 pays Company A the full tax
invoice value of R11 400, so that Company A is not out of pocket. But, Company B can't claim the Vat
of R1 400 as input tax
because it relates to entertainment. Company A doesn't issue a tax
invoice to Company B, but merely a statement to recover the payment it made on behalf of Company B.
Here's the rule on businesses, Vat and the entertainment industry:
SARS will let businesses who provide meals, refreshments and accommodation, claim input tax
on items constituting 'entertainment'. As long as they recover the full costs from their customers.
Note: The Vat
on the cost of meals and refreshments provided on busses, planes, trains and ships isn't denied when included in the ticket price.