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What you NEED to know about exempt supplies and how to handle them

by , 18 December 2013
You must tread carefully when dealing with exempt supplies. One mistake could see you facing a fine or (heaven forbid!) imprisonment of at least 60 months. But you can avoid this if you have the knowhow...

According to Philip Rosenberg, Managing Editor of VAT201 E-report: The comprehensive guide to completing your Vat return correctly, the general rule is that if you're a Vat vendor, you must include Vat at either the standard or zero rate in the price of the goods and services you supply; and declare this to SARS at the end of your particular Vat period.

If you have a Vat liability, you'll have to pay it over to SARS.

BUT, there's an important exception to the general operation of the Vat rules: Exempt supplies.

What are exempt supplies?

The Vat Act doesn't supply a definition of the expression 'exempt supply', apart from the cryptic observation that it's– 'a supply that is exempt from tax under Section 12' (Section 1).

Here are three things you must remember about exempt supplies

#1: You don't charge Vat on exempt supplies of goods or services.

#2: You don't include the value of your exempt supplies in your taxable turnover.

#3: If you only make exempt supplies of goods or services, you don't have to register as a Vat vendor even if your turnover is more than R1 million.

This means you'll be spared the pain of accounting for and paying over Vat to SARS, as well as submitting returns and record keeping for Vat purposes.

Caution: The disadvantage is that you're barred from recovering any input tax you paid for those exempt supplies of goods or services.

Here's an example of how you'd account for exempt supplies

Mrs B runs a crèche and an afterschool care centre. She charges R1 000 per month for each of the 120children who are enrolled at the centre. Her monthly expenses amount to R57 000, of which R7 000 is Vat.

Annual income (R1 000 x 120) R120 000 x 12 = R1 440 000 Annual expenses (including Vat) R57 000 x 12 = R684 000.

Mrs B won't register as a vendor even though her annual income is in excess of the R1 million threshold.

This is because she's providing an exempt service of caring for children in a crèche. As Mrs B may not register for Vat, the R7 000 Vat incurred can't be deducted as input tax, and consequently the amount will form part of the business costs of running the facility.

It's that simple. Now that you know all about exempt supplies and how to handle them, make sure you get it right.

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