Output VAT

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Output VAT

• 07 May 2024
• VAT
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2025.

1. Background

A client purchased a truck in 2023 which was financed, and claimed input tax (capital) on the purchase of the truck. Unfortunately, the truck was involved in an accident in February 2024, resulting in it being written off by the insurance company. The insurance settlement covered R240,000 of the outstanding finance loan to the bank. Additionally, the insurance deposited an extra R24,000 into the client's bank account.

As a result, the client financed a new truck, and the client claimed input tax (capital input) on the purchase of the new truck.

2. The Facts / Problem

What are the VAT implications for the client in terms of the insurance settlement?

3. Applicable Law 

VAT Act Section 8(8)

4. Application of the Law to the Facts

In terms of the VAT Act, the insured vendor must account for output tax on the full settlement received from the insurance company as compensation for the loss of the vehicle. Therefore, the client must account for output tax on R264 000, which is the sum of R240 000 and R24 000.

The SARS guide VAT 421 - Guide for Short-Term Insurance states that even if the payment was not physically received by the insured, but rather, paid directly to a third party on behalf of the insured, the insured is still required to account for output tax on the full indemnity payment.

Input tax will be claimed on any new acquisition of a truck.

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FAQs

1. What is output VAT in South Africa?

Output VAT is the Value-Added Tax that a VAT-registered business charges on its taxable supplies of goods or services to customers, which must be paid to SARS.

2. When must a business charge output VAT?

A VAT-registered business must charge output VAT on all standard-rated and some zero-rated taxable supplies made in the course of its enterprise.

3. How is output VAT calculated?

Output VAT is calculated as a percentage of the taxable supply’s selling price. In South Africa, the standard VAT rate is currently 15%.

4. Is output VAT the same as input VAT?

No. Output VAT is collected on sales, while input VAT is the VAT a business pays on purchases. Businesses can offset input VAT against output VAT when submitting returns.

5. What are the reporting requirements for output VAT?

Businesses must report output VAT in their VAT 201 returns and pay the net VAT amount (output VAT minus input VAT) to SARS within the prescribed period.

6. Can output VAT be refunded?

Yes. If input VAT exceeds output VAT for a tax period, the excess may be claimed as a refund or carried forward to the next period, subject to SARS rules.

7. Does output VAT apply to zero-rated and exempt supplies?

Output VAT is not charged on exempt supplies. Zero-rated supplies are taxable but at 0%, allowing input VAT recovery, but no VAT is charged to the customer.

8. What happens if output VAT is not charged correctly?

Incorrectly charging output VAT can lead to SARS penalties, interest, and adjustments, so accurate invoicing and compliance are critical.

9. Can a business adjust output VAT on returns?

Yes. Businesses may adjust output VAT for discounts, credit notes, or changes to supply terms in accordance with VAT regulations.

10. Why is understanding output VAT important for businesses?

Proper output VAT management ensures compliance with VAT laws, accurate reporting to SARS, and correct recovery of input VAT, which is crucial for cash flow and avoiding penalties.

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