VAT at 15%: inclusive and exclusive amounts

Money that passes through the business

When you buy a file at Lerato's Stationery in Polokwane and pay R115, not all of that R115 belongs to the shop. R100 belongs to the shop and R15 is Value-Added Tax, which the shop collects on behalf of SARS and hands over later.

Start with the effect, not the label. The shop's bank increased by R115, but the shop's income only increased by R100. The extra R15 is a debt the shop now owes SARS. Money came in, but part of it was never the shop's money.

The VAT rate in South Africa is 15%.

One item, two prices

Every price you meet is either exclusive of VAT (the VAT has not been added yet) or inclusive of VAT (the VAT is already sitting inside the number). Wholesale price lists usually quote exclusive prices. Shelf prices and till slips are inclusive.

Three conversions do all the work:

The 15/115 fraction looks strange until you see where it comes from. If the exclusive price is 100 parts, VAT is 15 parts, so the inclusive price is 115 parts. The VAT is therefore 15 parts out of the 115 parts you are holding.

Working in both directions

Worked example. Lerato's Stationery buys a display stand from a supplier who quotes R1 200 excluding VAT.

1. VAT = 1 200 x 15/100 = R180
2. Amount payable = 1 200 + 180 = R1 380 including VAT

Later Lerato finds a till slip for R1 380 and cannot remember the exclusive price. She works backwards:

1. VAT = 1 380 x 15/115 = R180
2. Exclusive amount = 1 380 - 180 = R1 200

The two calculations must agree, which is a free way to check yourself. If your exclusive amount plus your VAT does not rebuild the inclusive amount exactly, one of the two steps is wrong.

Why the split matters to the accounting records

The R180 is not income and it is not an expense. It is a temporary holding of someone else's money. That is why VAT is always separated out of the amount before the income or the asset is recorded. A business that records R1 380 as income overstates its profit by R180 and quietly spends money that belongs to SARS.

Core checkpoint: you can move between exclusive and inclusive amounts in both directions at 15%, and you can explain that the VAT portion of a sale is a debt to SARS rather than income of the business.