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Budget VAT changes uncovered

Ernst & Young and KPMG

17 February 2010

Ernst & Young and KPMG give the low down.

Ernst & Young summary

Miscellaneous amendments: Value-Added Tax Act (1991)

· Movable goods supplied to foreign-going ships

Currently the supply of goods by a vendor to a foreign going ship would be subject to the zero rate provided that the foreign going ship is used for commercial purposes. The provision excluded military and privately owned vessels that are not used for commercial purposes. The application of the zero rate would be extended to include all foreign going vessels whether they are used for commercial purposes or not. The main test for the zero rate to apply may be whether the vessel is on a foreign going voyage.

· Inter-group supplies accounted for on a loan account

The legislation prescribes that input VAT should be reversed on a supply where the creditor remains unpaid for a period of 12 months. This rule was introduced to limit avoidance structures implemented by certain vendors and to align the input tax rules with the output tax relief provided for on bad debts written-off. However, the rule negatively impacted on group companies with a central procurement function and group entities operating without using their own bank account. It is proposed that this rule be relaxed and would reduce the cost of compliance for some groups. This rule proved to be too restrictive where groups operate inter-group loan accounts for commercial reasons which are not cleared within 12 months and will be welcomed by selected group companies.

· Double charge on deregistration

It is proposed that a potential double VAT charge be removed in respect of two differing yet interlinked provisions. The potential double charge relates to the input VAT payback provision on creditors that remains unpaid for a period of 12 months and the output VAT payable on assets upon deregistration of a vendor.

· Commercial Accommodation

The supply of commercial accommodation as provided by for example hotels is taxable at the standard rate whilst the supply of residential accommodation is exempt. Due to the technical interpretation of the legislation certain suppliers potentially met the requirements of both commercial and residential accommodation. SARS intend to rectify the anomaly during 2011.

· Pooling arrangements

The legislation currently provides for certain farming and rental activities of multiple parties to be treated as a single vendor for VAT purposes. However, SARS received numerous requests for rulings to allow other types of industries to account for VAT using the pooling concept such as the betting, trucking and shipping industries. In light of the fact that SARS has granted permission to certain of these industries to account for VAT using the pooling concept, it is their intention to formally extend the pooling concept to other industries.

· Documentary proof for claiming a notional input tax deduction

Currently a notional input tax deduction may be made on the acquisition of second hand goods only to the extent that the vendor has paid for the goods. However, the documentary requirements in order to substantiate this notional input tax claim do not formally include proof of payment. SARS will include specific proof of payment requirements in the legislation.

· Payment of VAT in respect of imported services

Registered vendors are required to declare output tax in respect of imported services on form VAT215 within 30 days. Certain vendors obtained permission from SARS to disclose the VAT payable on imported services on their monthly VAT returns. Vendors will be allowed to use any of the two methods without obtaining specific permission. This change is welcomed as it simplifies the compliance process.

· Claiming input tax deductions on invoices not exceeding R50

In terms of the legislation a vendor is not entitled to claim VAT as an input tax deduction unless he is in possession of valid tax invoice. From a tax invoice perspective the VAT Act does not require a supplier to provide a tax invoice if the total consideration for the supply does not exceed R50. The intention of the R50 de minimis rule is to simply administration for the buyer. The legislation does not specify any documentary requirements in such instances and an amendment is proposed to provide for specific alternative documentary proof.

Wynand Roodman, senior manager indirect tax (VAT) at KPMG summary

Firstly, it has been acknowledged that the current VAT treatment results in a disproportionate adjustment when residential property developers change the use of their units, previously constructed or acquired for resale (taxable supplies), to residential rental accommodation (exempt supplies). The legislation will be reviewed to ensure an equitable value on which the change of use adjustment can be made going forward.

Comment: The current treatment is that an output tax adjustment is required to be calculated on the open market value of the property, whereas the subsequent input tax adjustment is to be done on the lesser amount of the cost or open market value. For example: a developer constructs a unit at a cost of R570 000, whilst the market value is R1,14m. He decides to let the property for residential use and is therefore required to account for output tax of R140 000. When the property is eventually sold, he is entitled to an input tax adjustment of R70 000, although he declared VAT of R140 000.

This anomaly has been in existence since the introduction of the VAT Act. The VAT effects were first discussed by SARS in VAT News 14, but it erroneously implied that the VAT declared on the output tax and input tax adjustments is equal. In some instances, this VAT News was relied upon as a general ruling and vendors held SARS to its interpretation. However, in the subsequent VAT 409 Guide it is correctly stated that the input tax adjustment needs to be calculated on the lesser amount of the open market value or cost.

It will be interesting to see how the VAT Act is amended as some foreign jurisdictions use different approaches to the matter. In the meantime, vendors required to declare adjustments of the nature discussed above should consider applying for a ruling from SARS to ensure that there is no ultimate VAT cost.

Secondly, the classification of accommodation as either commercial or residential accommodation in certain cases will be reviewed. An example is student accommodation in a flat with furniture and other fittings, without any services. The view is that interpretation is marginally pushing this type of accommodation into the ambit of commercial accommodation.

Comment: The terms ‘commercial accommodation' (used in taxable supplies) and a ‘dwelling' (used in exempt supplies) are mutually exclusive terms. However, they are not defined clearly enough to cater for certain types of accommodation, the example cited in the Budget Review being a good one. The classification of the supply of accommodation as either taxable or exempt has a direct VAT effect and on the pricing of the accommodation. Thus, if the accommodation is taxable, the vendor can claim input tax on the acquisition of the property and related running expenses, but must charge VAT on the rentals. If the accommodation is exempt, the VAT on the acquisition of the property and the related running expenses is a cost to the owner. However, the owner cannot charge VAT on the rental.

No doubt, once the amendments are in place, certain vendors may be required to deregister for VAT and pay VAT on the property as the accommodation may change from taxable to exempt. It would be preferable that such vendors either be allowed to remain on register, or be given the option to pay the VAT.

Other VAT related proposals that need noting:

The VAT Act provides for the zero rating of the supply of goods or services by vendors to foreign-going ships where they are engaged in commercial activities. It is proposed that these zero rating provisions be extended to also cover other ships (eg military ships) that are not engaged in commercial activities. Although reference has only been made to goods supplied to these ships, it is hoped that it will be extended to services as well.
The claw back of input tax in cases where payment for the supply has not been made within 12 months will be considered in order to provide relief within a group context and on deregistration of vendors in order to prevent unintended anomalies. In our view, these amendments are way overdue. In the case of a vendor who deregisters for VAT and is required to pay VAT twice, i.e. under the specific claw back provision and the deregistration provision, it is suggested that a ruling be obtained from SARS to ensure that VAT is only paid in one instance.
The VAT Act permits a body, which manages an agricultural pool or a rental pool, to deem the pool to be an enterprise carried on by that body separately from its members under certain circumstances. It is proposed that this pooling concept is formally extended to other industries.
The documentary requirement to claim a notional input tax deduction does not require that the proof of payment for such goods be disclosed. Proof of payment will be required in future to ensure certainty in this regard.
An amendment will be made to allow vendors with the option of using either the VAT201 or VAT215 forms to declare VAT on imported services without obtaining prior permission from SARS.
An amendment will be made to prescribe alternative documentary proof, eg, a till slip, in instances where the consideration for a supply is R50 or less.