Output VAT, input VAT and what you owe SARS

Two directions, two names

A registered business meets VAT twice in the same month.

When it sells, it charges VAT on top of its price and holds that money for SARS. That is output VAT, because it goes out with the goods that leave the business.

When it buys, it pays VAT to its own suppliers. Because the business is registered, it may claim that VAT back. That is input VAT, because it comes in with the goods that enter the business.

Effect first: output VAT increases what the business owes SARS. Input VAT reduces what the business owes SARS. At the end of the VAT period, only the difference is actually paid over.

Amount payable to SARS = output VAT - input VAT

If the input VAT is larger than the output VAT, the difference runs the other way and SARS owes the business a refund. That happens to a business that has bought heavily and sold little, such as a shop stocking up before December.

Netting off a month

Worked example. Sipho's Hardware in Mthatha is VAT registered. For March:

• Sales for the month: R92 000 including VAT
• Stock and supplies bought: R57 500 including VAT

Step 1, output VAT on sales: 92 000 x 15/115 = R12 000. The exclusive sales figure is R80 000.

Step 2, input VAT on purchases: 57 500 x 15/115 = R7 500. The real cost of the stock is R50 000.

Step 3, amount owed to SARS: 12 000 - 7 500 = R4 500.

Sipho collected R12 000 of other people's money and already handed R7 500 of tax to his own suppliers, so he settles the R4 500 difference with SARS.

Notice what the income statement sees: sales of R80 000 and stock costing R50 000. The VAT never appears there at all. It lives entirely in the balance sheet section as an amount owing.

Why the difference is fair

VAT is a tax on the value added at each step. Sipho bought at R50 000 and sold at R80 000, so he added R30 000 of value. Fifteen percent of R30 000 is R4 500, which is exactly what he pays. Every business in the chain pays tax only on the slice of value it added, and the final consumer, who cannot claim anything back, carries the whole 15%.

Core checkpoint: you can calculate output and input VAT from inclusive totals, net them off to find the amount payable to SARS, and explain why input VAT is a claim rather than a cost.