VAT – Page 3 – Rust Gold

7 May

Since 2015, foreign suppliers of electronic services (such as audio-visual content, e-books etc.) in South Africa are deemed to operate an enterprise for VAT locally. Although the regime has been in place for several years, new regulations in this regard are continuously published, the latest being on 18 March 2019, with an effective date of 1 April 2019. Along with the new regulations, SARS has published a “FAQ” document that addresses some of the questions that vendors and the public at large are likely to have about the implications of the updated regulations and recent legislative amendments. Below, we explore some of the more pertinent matters that SARS addresses in the “FAQ” document.

What are electronic services?

Electronic services mean any services supplied by a non-resident for consideration using –

· an electronic agent;

· an electronic communication; or

· the internet.

Electronic services are therefore services, the supply of which –

· is dependent on information technology;

· is automated, and

· involves minimal human intervention.

Simply put, this means that from 1 April 2019, you will have to pay VAT on a much wider scope of electronic services. The regulations now include any services that qualify as “electronic services” (other than a few exceptions) whether supplied directly by the non-resident business or via an “intermediary”.

Some examples include:

· Auction services;

· Online advertising or provision of advertising space;

· Online shopping portals;

· Access to blogs, journals, magazines, newspapers, games, publications, social networking, webcasts, webinars, websites, web applications, web series; and

· Software applications downloaded by users on mobile devices.

What is specifically excluded from the ambit of electronic services in the updated regulations?

Excluded from the updated regulations are –

· telecommunications services;

· educational services supplied from an export country (a country other than South Africa), which services are regulated by an education authority under the laws of the export country; and

· certain supplies of services where the supplier and recipient belong to the same group of companies.

What is the reason for the updated regulations?

The original regulations limited the scope of services that qualified as electronic services, and which must be charged with VAT at the standard rate. The intention of the updated regulations is to substantially widen the scope of services that qualify as electronic services, so that all services supplied for a consideration (subject to a few exceptions), which are provided by means of an electronic agent, electronic communication or the internet, are electronic services and must be charged with VAT at the standard rate.

Do the updated Regulations make a distinction between Business-to-Business (B2B) and Business-to-Consumer (B2C) supplies?

No, there is no distinction between B2B and B2C supplies, therefore, B2B supplies will be charged with VAT at the standard rate. This outcome was intentional as the South African VAT system does not fully subscribe to the B2B and B2C concepts.

What are some examples of supplies that are not electronic services?

· Certain educational services

· Certain financial services for which a fee is charged

· Telecommunications services

· Certain supplies made in a group of companies

· The online supply of tangible goods such as books or clothing

· Certain supplies or services that are not electronic services by their nature, but where the output and conveyance of the services are merely communicated by electronic means, for example:

o a legal opinion prepared in an export country, sent by e-mail; and

o an architect’s plan drawn up in an export country and sent to the client by e-mail.

Given the much wider scope of application for electronic services, both local and foreign vendors need to ensure that VAT is levied at the appropriate rate on the supply of electronic services – and local vendors, where relevant, need to retain the necessary supporting documents to substantiate any input tax claims.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

11 Jan

SARS releases new ruling on documentary requirements for VAT purposes

Kirsten Van Tonder

Tax SARS, Tax, VAT

In February 2015 the South Atlantic Jazz Festival (Pty) Ltd successfully appealed a judgment of the Tax Court to the Full Bench of the Western Cape High Court (reported as ABC (Pty) Ltd v CSARS [2015] ZAWCHC 8). That judgment dealt with documentary proof required by the Commissioner for SARS to substantiate input tax claims submitted by taxpayers for VAT purposes, and specifically the scope of the provisions of section 16(2)(f) of the Value-Added Tax Act, 89 of 1991.

Since the judgment documentary proof linked to VAT input claims have been a focus of Government, with both the subsequent amendment of section 16(2)(f) as well as the introduction of section 16(2)(g). Especially the latter provision is important here and deals primarily with what documentary evidence will suffice as substantiating proof for VAT input claims submitted by a VAT vendor in the absence of for example an invoice received from the supplier, a bill of entry or credit note. The question in ABC above for example was whether a signed agreement could under these circumstances suffice as substantiating proof for an input tax claim submitted.

Section 16(2)(g) now reads that “… in the case where the vendor, under such circumstances prescribed by the Commissioner, is unable to obtain any document required in terms of [section 16(2)] (a), (b), (c), (d), (e) or (f), the vendor is in possession of documentary proof, containing such information as is acceptable to the Commissioner, substantiating the vendor’s entitlement to the deduction at the time a return in respect of the deduction is furnished…”

SARS has now released a binding general ruling (BGR36) on 24 October 2016 dealing with those circumstances under which the Commissioner will allow a VAT vendor to use alternative documentary proof to substantiate the vendor’s entitlement to an input tax deduction as contemplated in section 16(2)(g). In order to obtain the Commissioner’s approval to use alternative documentary proof in substantiating a deduction under section 16(2)(g), a VAT vendor must apply for a VAT ruling or VAT class ruling.

In terms of the ruling, a VAT vendor may only apply for approval under section 16(2)(g) to rely on documentary proof, other than the documents prescribed under section 16(2)(a) to (f), if the vendor

has sufficient proof that it made reasonable attempts to obtain the documentary proof required by the Commissioner under section 16(2)(a) to (f);
was unable to obtain and maintain the documentation prescribed under section 16(2)(a) to (f) due to circumstances beyond the vendor’s control (see below); and
no other provision of the VAT Act allows for a deduction based on the particular document in the vendor’s possession.

BGR36 continues to list those circumstances when it would be considered to have been beyond the VAT vendor’s control to provide the otherwise required documentation:

When the supplier has failed to issue a tax invoice, debit note or credit note to the VAT vendor;
Where the supplier was contacted but failed to respond to the vendor’s request to be furnished with a complete tax invoice or correct document;
The supplier or vendor’s place of business has suffered damage as a result of for example a natural disaster, causing damage to its accounting records, with no possibility of the said records being retrieved or re-issued; or

(d) The supplier has been deregistered as a vendor.

12 Sep

Bad debts and VAT

Kirsten Van Tonder

Tax Debt, Tax, VAT

While there is currently a focus on the income tax considerations of bad and doubtful debts (given that National Treasury has proposed changes to section 11(j) of the Income Tax Act[1] to allow for an allowance of 25% of impairments in respect of doubtful debts), the Value Added Tax (VAT) aspect of bad debts is often overlooked.

Section 22 of the Value Added Tax Act[2] determines that a VAT vendor who accounts for VAT on the invoice basis may deduct input tax in respect of debts which have become irrecoverable and written off. To be able to claim the input tax deduction, three requirements should be met:

There must have been a taxable supply for a consideration in money;
The vendor must have already properly accounted for the output VAT on that supply; and
The vendor must have written off the amount of the consideration that has become irrecoverable.

The first two requirements should be relatively easy to meet since they generally occur in the ordinary course of business. The final requirement may potentially be more difficult to substantiate.

The VAT Act does not provide any further guidance on what constitutes “irrecoverable” or “written off”. A similar hurdle is present in the Income Tax Act, that does not elaborate on what the meaning is of debt that has become “doubtful” and debt that has “become bad”. Arguably, the requirements in the VAT Act stating that the debt must be “written off”, goes a step further than debt that is merely “doubtful” or that has “become bad”. It is also not certain to what extent the South African Revenue Service could draw comparisons between how a taxpayer treated the same debt for income tax and VAT purposes. Taxpayers should, therefore, exercise caution when they attempt to claim the allowable input tax and ensure that the facts support a case for a debt that has been written off. The input tax that can be claimed is equal to the tax fraction (15/115) applied to the amount actually written off.

Importantly though, if a vendor has success in recovering a portion of the debt previously written off, this must again be accounted for as output tax. Taxpayers that form part of a group of companies should also note that if the debt has been written off between wholly-owned members, the additional input tax is not allowed.

[1] 58 of 1962 (the Income Tax Act)

[2] 89 of 1991 (the VAT Act)

13 Jun

How the VAT increase affects your business

Kirsten Van Tonder

Business Business, Goods, VAT

Consumers and suppliers have by now had an opportunity to familiarise themselves with the increased Value-Added Tax (VAT) rate of 15% since 1 April 2018. There are however many technical considerations related to the increase that remain unclear. One such an uncertainty is with regards to deposits paid prior to the effective date of the increase, while goods and services are only rendered thereafter.

VAT vendors often require that consumers pay a deposit to secure the future delivery of goods or services (for example, an advance payment for the manufacture of goods, bookings in advance for holidays or accommodation etc.). The deposit paid by the consumer is then off-set against the full purchase price once they eventually receive the goods or services. The question arises what VAT rate the consumer will finally be subject to, where they paid a deposit before 1 April 2018, but the actual delivery of goods or services only takes place thereafter.

The answer to this question is found in the time of supply rules contained in section 9 of the Value-Added Tax Act.[1] In terms thereof, the “time of supply” of goods and services is at the time an invoice is issued by a supplier, or the time any payment of consideration is received by the supplier, whichever is the earlier. Two important concepts stem from this rule.

Firstly, an “invoice” needs to be issued by a supplier. In terms of section 1 of the VAT Act, an “invoice” is a document notifying someone of an obligation to make payment. It is therefore not necessary that a “tax invoice” – which has very specific requirements – needs to be issued. If consumers received only a “booking confirmation”, “acknowledgment of receipt” or similar document prior to 1 April 2018 that did not demand payment (such as tax invoice or pro-forma invoice), the time of supply was not triggered, and consumers will be subject to the 15% VAT rate once the goods or services are finally delivered after 1 April 2018.

Secondly, any deposit that was paid by the consumer, would have had to be applied as “consideration” for the supply of the goods or services to constitute “payment”. In this regard, consumers are largely dependent on how VAT vendors account for deposits in their financial systems. If deposits are accounted for separately (which is often the case with refundable deposits or where there are conditions attached to the supply) and only recognised as a supply when goods or services are received by the consumer, the deposit (although a transfer of money has occurred), would not constitute “payment”. For example, the time of supply may only be triggered once a guest has completed their stay at a guest house after 1 April 2018, resulting in VAT being levied at 15%.

The take away from the time of supply rules is therefore that payment of a deposit prior to 1 April 2018 does not necessarily result in a supply at 14% VAT and the rate to be applied is dependent on the specific facts of each case. Both consumers and VAT vendors should also take note that there are a number of rate specific rules that apply during the transition phase, and are encouraged to seek advice from a tax professional when they are in doubt about the rate to be applied.

[1] 89 of 1991 (the “VAT-Act”)

9 Apr

Claiming VAT input on “pre-enterprise” expenditure

Kirsten Van Tonder

Tax SARS, Tax, VAT

In terms of section 17 of the Value-Added Tax Act, 89 of 1991, a registered VAT vendor is entitled to claim back any amounts of VAT paid on goods and services acquired or imported that will be used in the furtherance of that particular VAT enterprise. The ability to claim input VAT in this manner is however limited to VAT vendors only and the wording of section 17(1) makes it clear that input tax may only be claimed in respect of goods and services supplied to a vendor – in other words, a person that is already a registered vendor at the time that the goods or services are supplied to him/her.

Section 18(4) of the VAT Act provides relief for persons incurring expenses in the form of goods or services being supplied to them in anticipation of a VAT enterprise being set up. In terms of that provision, and notwithstanding section 17, where VAT is paid on goods or services acquired by a person and those goods or services will subsequently be supplied as part of a VAT enterprise, those goods or services on which VAT was paid historically will be deemed to have been supplied to that VAT vendor only at the stage that those goods or services are used by it to supply its own VAT supplies. In other words, the provision enables the person, who earlier would not have been able to enter a claim for input tax, to claim input tax on those goods and services supplied to him/her previously, before becoming a VAT vendor.

The relief is not only limited to goods or services supplied to the now-VAT vendor and on which VAT was paid, but also extends to second-hand goods which were previously acquired by it and is now also used in the furtherance of its VAT enterprise.

From a practical perspective, we often find in practice that SARS disallows such claims for input tax on the basis that the claiming vendor’s VAT number does not appear on the invoice which it would submit in support of its input VAT claim subsequently. This is obviously incongruous, since the VAT-claiming vendor under these circumstances could not have had its VAT number appear on the invoice of another vendor which supplied goods or services to it, simply since the vendor would not have had a VAT number at that stage, yet is perfectly eligible to submit a VAT input claim in terms of the provisions of section 18(4). We would argue that SARS’ approach is contradictory to the wording of section 20(4)(c) of the VAT Act which requires the following to appear on invoices submitted by vendors in support of an input tax claim:

“… the name, address and, where the recipient is a registered vendor, the VAT registration number of the recipient”.

Clearly, where a vendor submits an invoice to claim input VAT on “pre-enterprise” expenditure incurred, that vendor will not have been a registered vendor at that time, therefore in our view highly arguably not required to have its own VAT number on an invoice in order to support a claim for input VAT on “pre-enterprise” expenditure.

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