Tax and SARS knowledge base
How do mixed taxable and exempt supplies affect input VAT apportionment?
How do mixed taxable and exempt supplies affect input VAT apportionment?
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Direct answer
Where a VAT vendor buys goods or services partly to make taxable supplies and partly to make exempt or other non-taxable supplies, it may deduct input tax only to the taxable-use extent. Directly attribute a cost where it belongs wholly to one activity. For a genuine mixed expense, use a SARS-approved apportionment method, normally the standard turnover-based method unless SARS has approved an alternative.
Do not choose a percentage merely because it seems commercially reasonable. The method and the resulting proportion must meet the SARS requirements.
What this means in practice
The first question is not always "what percentage can I claim?" It is whether the cost can be directly attributed. A cost used wholly to make taxable supplies is different from a cost used wholly to make exempt or other non-taxable supplies. Those costs should be separated before a mixed-use calculation is considered.
Mixed expenses are costs that cannot fairly be attributed wholly to one side. SARS states that input tax on these expenses is deductible only to the taxable-use extent. The vendor must establish that extent using an apportionment method approved by SARS, so that only a fair and reasonable proportion is deducted.
SARS describes the standard turnover-based method in BGR 16 as the default method for mixed expenses where that method is fair and reasonable. A vendor that considers it inappropriate must apply for a VAT ruling to use an alternative method. A change in method, or a request to deal with past returns, is not a routine bookkeeping adjustment.
Step-by-step
- Map the activities.
List the supplies the vendor makes and identify which are taxable, exempt or other non-taxable. Keep the description practical enough for another reviewer to understand the income streams and costs.
- Directly attribute each cost first.
Review invoices and contracts to decide whether a cost belongs wholly to taxable supplies or wholly to exempt or other non-taxable activity. Record the reason. Only costs that genuinely support more than one type of activity should move to the mixed-expense analysis.
- Identify the approved method.
Check whether the vendor uses the standard turnover-based method or has a current SARS ruling approving another method. Do not introduce a new allocation basis without confirming that it is approved and appropriate.
- Prepare clear working papers.
Keep the invoices, direct-attribution records, turnover data, calculation and assumptions together. The records should show why an expense was directly allocated or treated as mixed, and how the deductible share was determined.
- Seek advice before changing a historic approach.
A vendor that has not apportioned where it should have, or that wants a different method, should obtain specialist advice before amending returns or applying for a ruling. The effect can be material and may be disputed.
Documents and records to keep
- VAT invoices and underlying cost records.
- Description of taxable, exempt and other non-taxable activities.
- Direct-attribution working papers for each cost category.
- Turnover information and the apportionment calculation.
- Any VAT ruling, SARS correspondence or approved method documentation.
- Return workpapers that reconcile the claimed input tax to the calculation.
Important limits and exceptions
Apportionment is not a shortcut for costs that can be directly attributed. Equally, a vendor should not deduct all VAT on a shared expense just because some taxable supplies are made.
The standard turnover-based method is not guaranteed to be fair and reasonable in every case. SARS says an alternative method needs a VAT ruling. Do not assume an alternative can simply be applied retrospectively, especially where previous VAT returns used no apportionment or a different basis.
This guide does not calculate a ratio for a particular vendor. Financial-services activities, changing business models and complex shared costs require tailored analysis.
When to get tailored advice
Get tailored advice before selecting or changing a method, revising historical VAT returns, or dealing with financial services, grants, cross-charges or other difficult mixed-use arrangements.
TaxProof can help organise costs and working papers so the issue is ready for review. It cannot approve an alternative SARS apportionment method or determine a vendor-specific ratio from a general guide.
Related TaxProof guides
- Input VAT expenses that you cannot claim
- When does VAT apply to services imported for use in an exempt activity? (B02-BUS-002)