Value Added Tax (VAT) is the tax charged on goods and services supplied and is charged at the current rate (standard rate) of 14%. VAT is an important part of the income generated by the government to cover government expenditure.
Who has to register as a VAT Vendor?
A person or business that supplies goods or services can register as a vendor (trader).
All businesses with a turnover of more than R1-million must register as a vendor (trader). This is COMPULSORY REGISTRATION.
Businesses with a turnover of less than R1-million can register if they want to. This is VOLUNTARY REGISTRATION.
The benefits of registering as a VAT Vendor
The business is able to claim back the amount of VAT paid on goods and services bought (VAT input).
Items on which VAT is not charged
Zero-rated items: Items charged at 0% VAT, but this can be changed by the government at any time. Examples are fresh fruit and vegetables, brown bread, milk, maize, rice, lentils and cooking oil.
VAT-exempt items: Items on which no VAT is charged. Examples are interest, rates, export services, educational services and childcare services.
VAT input
VAT input is the VAT paid by a business on the purchases of goods and services (which can be claimed back from SARS).
VAT output
VAT output is the VAT collected by the business on the sale of all goods and services (which needs to be paid over to SARS).
VAT output – VAT input = amount payable to SARS (see example 2, page 72)
VAT inclusive calculations: When VAT is included in an amount
(see example 1 below) (VAT inclusive) the calculation for VAT will be the amount × 14
114
VAT exclusive calculations: When VAT is excluded (VAT exclusive)
(see example 1 below) the calculation for VAT will be the amount × 14
100
Worked example 1: Trendy Suppliers
Trendy Suppliers uses a fixed mark up of 40% on cost. The business is registered as a VAT vendor. The current VAT rate is 14%.
Calculate the following:
Information
The following items were purchased during the month from Trendy Suppliers.
100 dresses @ R285 each (VAT inclusive)
80 pairs of jeans @ R180 each (VAT exclusive)
60 pairs of takkies @ R110 per pair (VAT exclusive)
Answers to worked example 1
Worked example 2: Mizi Stores
Mizi Stores, owned by Mia Mizi, is registered for VAT.
Calculate the amount of VAT to be paid over to SARS for the period ending 28 February 2011. [17]
Information for this period ending 28 February 2011
Answers to worked example 2
VAT output | VAT input | |
a) Total sales: 60 0003 × 14 114 | R7 368,42 | |
b) New computer bought: 12 000 × 14 114 | R1 473,68 | |
c) Trading stock bought: 20 0003 × 14 100 | R2 800 | |
d) Credit notes issued: 1 500 × 14 114 | R184,21 | |
R7 368,42 | R4 457,89 | |
VAT payable to SARS: R7 368,423 − R4 457,893 = R2 910,53 Total VAT output – Total VAT input = VAT payable to SARS |
[17]
There are different formats of completing the Input and Output VAT accounts however the correct information does end up in the VAT Control account. It is not likely you will be asked to do the Input or Output VAT account in the examination. The VAT Control Account is more likely to be asked.
Learners need to be able to complete the VAT Control account with all the relevant transactions without completing the Input VAT Control and Output VAT Control accounts.
Format of possible entries in the VAT control account
GENERAL LEDGER | |||||||||
Dr. VAT CONTROL ACCOUNT (CL) B Cr. | |||||||||
2014 May | 3 | Debtors Control | DAJ | 56 | 2014 May | 1 | Bank | CRJ | 4 200 |
8 | Discount allowed (claim VAT back from discount allowed amount) | GJ | 8 | 2 | Debtors Control | DJ | 1 400 | ||
12 | Bad debts | GJ | 28 | 9 | Discount allowed (cancel the VAT claim ) | GJ | 8 | ||
4 | Bank | CPJ | 700 | 10 | Drawings | GJ | 126 | ||
6 | Creditors control | CJ | 280 | 11 | Donations | GJ | 42 | ||
5 | Petty cash | PCJ | 21 | 7 | Creditors control | CAJ | 98 | ||
31 | Balance | c/d | 4781 | ||||||
5874 | 5874 | ||||||||
2014 June | 1 | Balance | b/d |
Schematic illustration of how all the entries from Output VAT Account and Input VAT account are recorded in the VAT Control Account | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Ensure that you know all the possible transactions and how the transactions are recorded in the VAT Control account.
Conclusion of the vat control account with all possible entries |
Take into account that the VAT CONTROL ACCOUNT is done to establish if the amount collected on behalf of SARS is more than the amount claimed from SARS.
|
DR VAT CONTROL ACCOUNT ( ) B CR | |||||
Debtors Control (Cancel the output VAT claimed when goods are returned by debtors) | DAJ | 56 | Bank (Cash sales: collect output VAT on behalf of SARS) | CRJ | 4200 |
Discount allowed (claim VAT back from discount allowed amount) (SARS allows a business to claim back the VAT part of discount allowed when a debtor pays his account on time: Cancel output VAT) | GJ | 8 | Debtors Control (Credit Sales: Collect output VAT on behalf of SARS) | DJ | 1400 |
Bad debts (When a business experienced bad debts, SARS allows you to claim back the VAT part of bad debts: Cancel output VAT) | GJ | 28 | Discount allowed (cancel the VAT claim) (Cancel of the discount claimed on the RD cheque: output VAT) | GJ | 8 |
Bank (Claim the VAT when goods are bought and paid for: Claim back Input VAT) | CPJ | 700 | Drawings (Must charge VAT when owner takes stock for own use: Collect output VAT on behalf of SARS) | GJ | 126 |
Creditors control (Claim the VAT when goods are bought on credit: Claim back Input VAT) | CJ | 280 | Donations (VAT charged on donated stock: Collect output VAT) | GJ | 42 |
Petty cash (Claim the VAT when goods are bought: with petty cash money: Claim back Input VAT) | PCJ | 21 | Creditors control (Cancel the VAT when goods are returned back to supplier: Cancel input VAT) | CAJ | 98 |
Balance | c/d | 4781 | |||
5874 | 5874 | ||||
Balance | b/d | 4781 |
Below is a list of suggested past examination questions for extra practice:
Topic | Paper | Question |
Calculations using General Ledger accounts | November 2010 | 1.3 |
Concepts and calculations | February/March 2012 | 1.1 |