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What you NEED to know about the Vat treatment of financial services

by , 20 January 2014
You must tread carefully when you deal with the supply of financial services. If you don't, there will be nasty surprises in store for you when you calculate your Vat and complete your VAT201 return. Here's everything you need to know about the Vat treatment of financial services so you can avoid this from happening to you...

Financial services are an exempt supply for Vat purposes. This is just one of the things you need to know when dealing with the supply of financial services and Vat.

So what else do you need to know?

Everything you NEED to know about the supply of financial services and Vat

  • As mentioned, financial services are an exempt supply for Vat purposes.
  • This means that you'll be excluded from charging Vat on the supply of a financial service.
  • You also won't be able to claim any input tax credits for expenses incurred in making the exempt financial services supply.
  • 'Financial services' is a broad term and doesn't apply exclusively to banks! Other businesses may supply services that will fall within the definition of the term, so be aware of which of your business activities will bring you into the ambit of the financial services exemption.
  • Fees and commissions charged for the supply of financial services aren't exempt and you'll have to levy Vat at the standard rate of 14% on those fees.
  • Common examples of hot areas to consider in regular business dealings include the cession of book debts and the extension of credit facilities to customers.

Warning: You need to know when it's NOT a financial service

The Practical Vat Loose Leaf Service explains that Section 2(4) of the Vat Act specifically tells us that, in dealing with the transfer of ownership of a debt security, the following three activities are not considered financial services and will, therefore, not be exempt from Vat. These activities are:

  1. The cession, assignment, transfer or other supply of any right to receive payment for any taxable supply where output tax for that taxable supply has not yet been paid over to SARS;
  2. The transfer of rights under a rental agreement; and
  3. The transfer of a right to the paid up portion of a share block shareholder's allocated loan.

Well there you have it. Now that you know about the supply of financial services and Vat, make sure you comply to avoid penalties.

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