Revealed: The difference between exempt supplies and zero-rated supplies and how knowing it can increase your company's cash flow

It's important that you don't confuse Vat exempt and zero-rated supplies. There's a difference between the two and getting it wrong means setting your business up for a SARS audit.

So what's the difference between Vat exempt and zero-rated supplies?

According to the Practical Vat Loose Leaf Service, exempt supplies are supplies that are exempt of tax. There's no output tax, no input tax and no tax invoices. Tax doesn't apply at all in this case.

On the other, hand zero-rated supplies are supplies that output tax is charged on at 0%. This means you can claim input tax for your business and tax invoices issued must show Vat at the zero rate.

Exempt supplies vs. zero-rated supplies – the breakdown

Exempt supplies

• Non-taxable supplies.
• Similar to supplies made by non -Vat vendors, which aren't taxable.
• If you make an exempt supply, you can't claim an input tax deduction on related expenses of goods or services.
• Don't form part of your taxable turnover.
• If you only make exempt supplies, you can't even apply for registration as a vendor as you don't qualify as one.
• An exempt supply doesn't need special documentary proof as you won't make any tax claims.

• Taxable supplies that are subject to Vat at a zero rate of 0% instead of the standard rate of 14%.
• A non -Vat vendor can't make a zero-rated supply.
• You CAN claim input tax deductions on related expenses of goods or services.
• Form part of your taxable turnover.
• Where you only make zero-rated supplies, you must still register for Vat if the value of your taxable supplies pushes you over the threshold.
• For legitimate zero-rating, you must keep detailed documentary proof.

Overall, the important points to remember are zero-rated supplies are more beneficial to your business. This is because you don't charge Vat on the supply, but you can still claim your input tax back. With exempt supplies, input tax is part of your cost and you'll have to pay penalties if you try to make an invalid claim for a refund.
 
Another important point to remember is that even though you don't declare output tax on zero-rated or exempt supplies, you must show them on your zero-rated and exempt sales on your Vat return. Otherwise you'll get flagged for a SARS' audit.