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Meet these 3 criteria in order to deduct input tax on entertainment expenses

by , 17 March 2016
When it comes to entertainment expenses, the general rule is that you may not make input tax deductions on them.

Failure to follow this rule can result in the deduction being reversed, alongside a penalty of 10% with monthly interest.

What's more is that SARS can, on top of all that, hit you with an understatement penalty of up to 200%!

But even though that's the case, it's worth noting that there are exceptions to the general rule.

So if your business makes taxable supplies of entertainment, and meets the following 3 criteria (as revealed on sars.gov.za), you'll be able to deduct input tax...

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.

Criterion#1: The goods or services obtained must be in the ordinary course of your business, which is regularly or continuously supplied.

What this means is that the goods and services acquired must clearly link to the type of entertainment your business supplies.

Criterion#2: The entertainment must be supplied for a consideration which covers the costs

In other words, your business must charge prices for its products and services that are intended to cover all direct and indirect costs related to supplying the entertainment.

Criterion#3: Supplies for no consideration

VAT law will allow you to claim input tax deductions on entertainment purchases, even though you don't charge your clients and customers for it, in the following 3 situations:

1.       If the entertainment is supplied as a genuine promotion, and that if the supply is directly related to the entertainment normally provided;

2.       Where the entertainment consists of food which was not completely consumed. So if you were to, for example, give that excess food to a welfare organisation, you can deduct input tax from it; and

3.       Where the entertainment consists of beverages and meals provided as subsistence by an employer to his employees, in certain situations…

*To learn more on VAT and entertainment expenses, go to chapter E 05 in your Practical Vat Loose Leaf Service handbook.
Alternatively, click here. 

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