Apportionment of VAT input claims

Generally speaking, the VAT portion of expenditure incurred by a VAT vendor in carrying on its enterprise may be claimed back from SARS when the VAT vendor submits is VAT returns on a periodical basis. Typically, these input tax claims are set off against the output tax liability that the VAT vendor may have. However, it is also often the case that the total input tax claims for a certain period may exceed the total output tax amount payable, resulting in a net refund amount due to the vendor for that particular period.

Section 17 of the VAT Act, 89 of 1991, governs the circumstances and the extent to which a registered VAT vendor may claim input tax to be set off against the output tax due to SARS. It specifically addresses those circumstances when goods or services are acquired partly for use as part of the VAT vendor’s enterprise, and partly for purposes of making VAT exempt or personal supplies. In such instances section 17(1) limits the amount of input tax to be claimed to “… an amount which bears to the full amount of such tax or amount, as the case may be, the same ratio (as determined by the Commissioner in accordance with a ruling …) as the intended use of such goods or services in the course of making taxable supplies bears to the total intended use of such goods or services”.

The ruling referred to in section 17(1) (Binding General Ruling 16, Issue 2) sets out the formula as:

y = a / (a + b + c) x 100

Where:

“y” =      the apportionment ratio/percentage;

“a” =      the value of all taxable supplies (including deemed taxable supplies) made during the period;

“b” =      the value of all exempt supplies made during the period; and

“c” =      the sum of any other amounts not included in “a” or “b” in the formula, which were received or which accrued during the period (whether in respect of a supply or not).

In other words, the calculation referred to aims to limit the input tax deduction to the extent that the expenditure item in question is incurred in the furtherance of the VAT enterprise only.

The calculation assumes that expenditure would be incurred by the VAT vendor generally proportionate to the total taxable supplies made by the enterprise vis-à-vis non-taxable supplies. It may very well be that that this assumption is inapplicable based on the facts of the VAT vendor. For example, where a company extends interest bearing loans to customers (thus exempt supplies) while also providing consulting services (a standard rate taxable supply), the above formula may very well be applicable to apportion the portion of input tax claimable on e.g. rent paid on offices and used both to earn interest and consulting income. However, where expenditure is incurred e.g. towards training for employees linked directly to the consulting business only, said expenditure would not be partly incurred for making taxable supplies and partly not, but wholly for the furtherance of the VAT enterprise and thus rank wholly as a claim for input tax.

BGR16 itself provides for an alternative basis of apportionment to be applied if a more appropriate basis exists. It should be borne in mind that section 17(1) also only comes into play if there is an apportionment to be made whatsoever.

We have noted that SARS is applying BGR16 strictly as part of VAT audits in recent months and even if it may be inappropriate to do so where it is to the disadvantage of taxpayers. Such instances should be monitored and pointed out to your tax advisors when applicable to take up with the SARS auditors timeously.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)