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Need to claim input tax on your lease agreement? Here's how

by , 14 November 2014
In the business world, you may not always be able to buy and own your company's assets. With prices climbing and profits decreasing, it may be an expense your company just can't afford.

That's where lease agreements come in. You can rent or lease an asset, equipment or machinery.

According to witness.com there are two kinds of lease agreements you can use to do this: A financial lease and an operational lease.

Both of these agreements can help you obtain the assets you need without the immediate high cost. But, they also have Vat implications.

The good news is, you can claim input tax on one of them.

Here's how ...

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Here are the Vat implications of financial and operational leases

The VAT Act defines instalment credit agreement as Vat inclusive and for VAT purposes you treat a finance lease the same way.
This means you can claim an input tax deduction of the full amount of VAT included in the purchase price of the asset at the commencement of the finance lease. But if you rent the asset on an operating lease, you can only claim an input tax deduction when you pay the monthly rental. 
Here's how you can claim this input tax. 

Do you have a rental agreement? Find out how to claim the Vat on it

With a rental agreement, it normally: 
Includes full maintenance lease agreements;
Requires payment in periods such as every month, every six months, once a year, etc.
Doesn't end with ownership transferring to the lessee.
With a rental agreement, the seller must charge Vat on the full value of the agreement. 
Basically, you pay Vat on the cost of the goods, including finance charges and pay it over to SARS every time you pay.
You can claim the Vat he paid as input tax, according to each periodical payment.
In this instance, you don't require a tax invoice for each payment. Your original agreement is enough if it contains all the details a tax invoice contains.
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Do you want to save the trouble of writing and developing your own Vat forms, templates and checklists?
 Click here for printable documents standard with your Digital Practical Tax Handbook.

Here's an example to explain how this process works

Mrs James enters into an agreement with Golden Glow to lease a spray tan machine for R 3.325 a month for 24 months. She signs the agreement on 31 January 2014 and the amounts pertaining to it are as follows: 
Cash cost of spray tan machine: R60 000
Finance charges: R10 000
Vat: R9 800
Total cost R79 800
Over 24 months = R3 325 per month, including Vat of R408
The two parties account for the Vat as follows:
Golden Glow pays output tax of R408 (R3 325 x 14/114) per month as it receives each payment. It accounts for this in its annual Vat return starting with the January 2015 tax period and every tax period after that for as long as the lease is valid.
Mrs James claims input tax of R408 per month as she makes the rental payments. She claims these amounts in her annual Vat return starting with the January 2015 tax period and every tax period after that, for as long as the lease is valid.
Don't let your rental agreements cost you and arm and a leg. Claim back the input tax and improve your company's cash flow.
For more on the Vat implications of rental and lease agreements, check out the Practical Vat Loose Leaf Service.

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