Originally Posted by
CLIVE-TRIANGLE
Hi Alanc, this should help
From SAICA:
Value-added Tax
1912. VAT apportionment
January 2011 - Issue 137
General
The VAT rules require a vendor who makes both taxable supplies and supplies other than taxable supplies (such as loans earning interest) to claim input tax only to the extent that the goods or services concerned are acquired for consumption in making taxable supplies.
Put differently, only a portion of the input tax incurred in respect of goods and services acquired for the purposes of making mixed supplies, such as general overhead expenditures in the case of a bank, may be claimed.
Calculating the ratio
To calculate the input tax that is recoverable on expenses consumed in the making of both taxable and exempt and non-supplies, the taxpayer must, in the absence of a specific SARS approval, apply the standard turnover-based method.
The ratio is calculated as follows:
Taxable % =
Total value of consideration for taxable supplies
________________________________________
Total value of consideration for all supplies
In terms of section 17 of the VAT Act, if the intended taxable use of the goods and services exceeds 95%, the goods and services concerned are regarded as having been acquired wholly for the purpose of making taxable supplies and the input VAT is then recoverable in full.
The “VAT 404 Guide for Vendors” specifies that the denominator (total value of all supplies) “should include any other amounts ‘received or accrued’ in the period (whether in respect of supplies or not)”. The terms “received and accrued” are not defined in the VAT or Income Tax Acts but the High Court ruled many years ago in Geldenhuys v CIR [1947] (14 SATC 149) case that “received” means “beneficially received” (i.e. on the recipients own behalf) and in CIR v People Stores (Walvis Bay) (Pty) Ltd [1990] (52 SATC 9) , that “accrued” means “unconditional entitlement”.
According to SARS, this means that vendors must include in the denominator (for example):
· realised gains on foreign exchange transactions
· dividend and interest income
· proceeds of a debtor’s book securitisation (for working capital purposes).
The vendor’s guide is also clear that consideration for non-supplies (an unusual category of transaction that we will not discuss here) must also be included and the taxpayer must obtain prior approval to exclude them should it result in an unfair or distorted apportionment ratio.
In our view, dividends received and foreign currency gains are generally not the result of any ongoing effort by a vendor and should properly be excluded on the basis that no inputs are acquired ‘for’ earning them. Unfortunately, discussions with SARS aimed at removing these amounts from the formula in appropriate instances have been consistently unsuccessful.
“Tainted” expenses
The next step is to determine the expenses/input VAT that requires apportioning.
SARS’ focus has recently moved from the calculation of the denominator to challenging the expenses in the “pot” that require apportioning.
SARS’ view is that even if an input is used minimally in making supplies other than taxable supplies, the related expense is “tainted” and the input VAT paid should be apportioned in accordance with the ratio calculated above. In other words, SARS applies the 95% only after all mixed inputs are in the pot, and does not apply it to determine whether an input should go into the pot in the first place. Again, in our view this is a blatant distortion of the clearly worded requirements of the legislation, but attempts to argue against it continue to fall on deaf ears.
What you can expect
Since withdrawing all rulings at the end of June 2007, SARS has not reconfirmed the apportionment rulings previously issued to vendors for the use of anything other than the standard turnover based method, so vendors using any other methodology are at risk.
SARS clearly views apportionment of input tax as a primary generator of revenue and vendors across all sectors can expect a knock on the door and to be challenged on input VAT claimed in full. Those vendors making non-vatable supplies in excess of 5% of their total receipts and accruals may therefore find themselves liable to apportion any VAT on inputs not wholly attributable to the making of taxable supplies, on the basis of the formula discussed above. Although the technical validity of this approach is, we believe, faulty, experience suggests that unless a vendor is prepared to take matters to court (and resist the temptation to settle), they might as well decide on the amount they are prepared to pay SARS to go away, and aim for a settlement on that basis.
Ernst & Young
VAT Act:S 17
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