[Question] VAT on deposit?

[Newretailer]

I am curious to know why a deposit for business premises attracts VAT. Surely it is not a service rendered? What is your take on it?

[KimH]

To the best of my knowledge a deposit for premises should not attract VAT, the first month's rental that is normally payable with the deposit however does.

Example:
Deposit R5 000.00
First month rental R5 000.00 + VAT - R 5 700.00
Total payable R10 700.00

You would then reflect your deposit in the balance sheet as 'Deposits Held' and the rental would be posted to the Rent Paid account in the Income statement

Actual journal entry
Bank Account CR R10 700
Rent Account DR R 5 000
VAT Control DR R 700
Deposits Held DR R 5 000

[BusFact]

I would agree with KimH. Think of a deposit as a loan of sorts. It does not form part of your income or expenses so does not attract VAT.

However the deposit required by the landlord might be the equivalent of the VAT inclusive amount. It itself does not include VAT and is not a VAT transaction, but the landlord want to recoup the full inclusive amount if there is an issue with payment later.

So using the above example, he want a deposit of R5700. It is not a deposit of R5000 + VAT.

Struggling to explaint his one, so hope its come across half clear.

[Justloadit]

I would agree with KimH. Think of a deposit as a loan of sorts. It does not form part of your income or expenses so does not attract VAT.

However the deposit required by the landlord might be the equivalent of the VAT inclusive amount. It itself does not include VAT and is not a VAT transaction, but the landlord want to recoup the full inclusive amount if there is an issue with payment later.

So using the above example, he want a deposit of R5700. It is not a deposit of R5000 + VAT.

Struggling to explaint his one, so hope its come across half clear.

When the landlord issues an invoice for rent, it is R5,000.00 plus R700.00 VAT. Your deposit is R5,700.00, but at the time of the deposit, a transaction has not taken place, and the landlord has not made an invoice, he simply has requested R5,700.00 as a surety value, in the case that you default. If you default and do not pay a month of rent, the landlord who issued an invoice for 5,000.00 plus R700.00 Vat, now uses your deposit of R5,700.00 to settle the debt. In the case that you never defaulted, and vacate the premises, the landlord must return the full R5,700.00 deposit you gave him as surety. He cannot keep the R700.00 for Vat purposes, as no sale was made, he is now returning your surety.

[Newretailer]

Thank you. That makes it perfectly clear.