As a general rule a registered Value-Added Tax (“VAT”) vendor my claim input VAT in respect of expenditure incurred in respect of goods or services supplied to it by another VAT vendor (“the supplier”), to the extent that the underlying expenditure is incurred for the purposes of making taxable supplies. “Taxable supplies” are supplies made by a vendor of goods and or services where output VAT is leviable at either the standard rate of 15% or the zero rate of 0%. This general rule is enshrined in the definition of “input tax” as found under section 1(1) of the Value-Added Tax Act No. 89 of 1991 (as amended) (“the VAT Act”) read with section 17(1). Section 17(1) provides that input tax is claimable to the extent that the underlying expenditure can be attributed to the making (or intention of making) a taxable supply and determines that should 95% or more of an expenditure be related to a taxable supply, the input tax is not required to be apportioned.
Apportionment only needs to be considered where the purpose of an expenditure item cannot be directly attributed to either a taxable or non-taxable supply – in other words, if a vendor cannot determine with 100% certainty that an expense relates wholly to a taxable supply or wholly to a non-taxable supply, the resultant input tax must be apportioned.
Section 17(1) further determines that the apportionment method to be used by the vendor must be approved by the SARS Commissioner – Binding General Ruling 16 (“BGR16”), issued by SARS determines that the only pre-approved apportionment method to be used by vendors is the Standard Turnover-based method. If the vendor wishes to use any other method of apportionment it mustapply to SARS for a ruling before it uses the method. A vendor cannot use an alternative method without SARS approving it first!
Practically, it is important for vendors to consider whether apportionment is necessary by reviewing its expenditure (i.e. the nature and purpose thereof) and assessing whether the Standard Turnover-based method results in a fair and reasonable outcome in so far as the claiming of input tax is concerned. Careful consideration should be given in respect of alternative apportionment methods and it is advisable that the assistance of a VAT specialist be sought.
To conclude, the objective of the above is two-fold 1). To ensure that the vendor does not overclaim input tax and be subject to understatement penalties where it has incorrectly claimed using a wrong apportionment method, and 2) To ensure that the vendor maximises its input tax claims within the confines of the VAT legislation.