VAT Connect Issue 15 (December 2022)


Proposed amendments emanating from the Budget 2022/23

Following the publication of the draft tax bills in July 2022 (mentioned in VAT Connect Issue 14), National Treasury and SARS published the following 2022 tax bills on 26 October 2022, which you can access on the SARS website by clicking on the links below.

VAT treatment of costs and disbursements

It is a common practice in some trades and professions to reflect certain charges or costs incidental to making a supply separately on an invoice or tax invoice issued to customers.  Examples include travel costs (such as airfare, petrol, toll fees), delivery charges, accommodation costs and meals. These additional amounts are labelled using different words such as “disbursements”, “costs”, “reimbursements”, “recoveries”, “recharges” and various other names. These words do not all have the same meaning and are often the source of disputes between parties. The question that arises in these cases is whether such separately specified amounts must be included in the consideration charged by the supplier when calculating the VAT which is due on a supply, or not.

There are essentially two types of situations which arise in this regard. For the purposes of this article, we will refer to items specified on the supplier’s invoice or tax invoice as being either “costs” (being the costs for which the supplier is liable) or “disbursements” (being costs for which the customer is liable). The other terms which are commonly used to describe such separate items should therefore be understood and categorised accordingly.

“Costs” refer to a situation where the supplier is integrating its own costs of making a supply into the final VAT-inclusive price charged to the customer. By reflecting the additional cost items separately on the invoice or tax invoice, the supplier is merely showing the customer what sort of specific expenses had to be incurred in order to make the supply. Depending on the terms and conditions of the contract, the supplier may be required to prove the costs, or to provide details as to how those costs were calculated. In this case, the VAT incurred on the separate supplies acquired by the supplier is for the supplier to deduct as input tax (provided the normal documentary requirements are met and they are not denied inputs). Therefore, where costs are incurred by the supplier to make a supply, VAT must be charged on all components separately listed as part of the final VAT-inclusive price.

“Disbursements” refer to a situation where the supplier has paid for specific expenses and supplies which are the responsibility of the customer. In this situation, the supplier acts on behalf of, and with the permission of, the customer to acquire certain goods or services from a third person on the customer’s behalf. The supplier then recovers the exact amount outlaid (including any VAT) by including it as a disbursement on the invoice or tax invoice. In this case, the VAT incurred on the separate supplies acquired by the supplier as agent for the customer is for the customer to deduct as input tax (provided the normal documentary requirements are met and they are not denied inputs). It would be expected in such a case that the third-party supplier would issue the tax invoice directly to the customer to support a claim for input tax, or it could be issued to the supplier (acting as agent of the customer) and then the supplier would, in turn, provide the tax invoice to the customer (or a statement as contemplated in section 54(3)). Therefore, where separate amounts correctly characterised as disbursements are indicated on an invoice or tax invoice to the customer, no VAT should be charged on that part as the VAT has already been charged by the third-party supplier to the customer and invoiced separately.

From the above explanations, it should be clear that the categorisation of expenses as being either “costs” or “disbursements” will depend on the contractual terms and conditions under which the supplier has been engaged. The VAT effect of each is completely different, so it is very important that when the supplier engages third parties in the process of making supplies to the customer, the capacity in which the supplier acts is clearly understood (that is, whether acting as principal, or as agent of the customer).

Example 1 – Costs incurred by the supplier

Vendor A is a property developer based in Cape Town. Vendor A engages the services of a geologist (Vendor B) who is based in Johannesburg to carry out a geological survey of a piece of land situated in Cape Town in connection with the potential development of a new shopping centre. The work will span over a period of one week. As part of the agreement, Vendor A agrees to “cover the cost” of Vendor B’s travel, accommodation and any incidental expenses within certain limits which Vendor A will incur whilst working on the project. Such expenses may include airfare, hotel accommodation and meals, car hire, toll fees, laundry charges, petrol and other incidentals. The contractual understanding of the meaning of “cover the cost” is that Vendor B will be allowed to add certain cost items to the bill over and above the standard charge for the geological services upon completion of the work.

The consequence of this arrangement is that when Vendor B issues the invoice or tax invoice for the geological survey, a number of additional cost items will appear on the bill (as agreed). The additional costs are for goods or services acquired by Vendor B in the course of carrying out the geological survey, and if any of those expenses include VAT, Vendor B will be entitled to claim the VAT thereon as input tax, subject to the usual documentary requirements and provided they are not denied inputs. When calculating the consideration to be billed to Vendor A, the charge for the geological services and all the agreed “costs” must be added up and included in the final VAT-inclusive price. Whether a particular amount constitutes a “cost”, how it is calculated, and whether or not that cost to the supplier included any VAT which was deductible as input tax in the hands of Vendor B is something that should be agreed between the parties.

Example 2 – Disbursements made by the supplier on behalf of the customer

A few years later, Vendor A in Example 1 engages the services of Vendor C who specialises in the supply and installation of escalators at shopping centres. Vendor C normally charges for the supply of the escalators and the installation services at a delivered price. Deliveries are normally done by a separate transporter, Vendor D. Any additional work not within the project specification is agreed to be for the account of Vendor A and will be carried out by preferred supplier Vendor E. Vendor C agrees to act as the paymaster for Vendor A in respect of any additional work that Vendor E carries out and contracts with Vendor E accordingly.

In this example, Vendor C will supply the escalators and installation services at a delivered price. Therefore, the delivery charges by Vendor D are for the account of Vendor C. If the delivery charges are shown separately on the invoice or tax invoice issued to Vendor A, they should not be shown as a disbursement. Vendor C will accordingly be able to deduct the VAT on the delivery charges provided the normal documentary requirements are met.

Vendor C will not be entitled to deduct any input tax on the consideration paid to Vendor E for the additional work carried out. The reason is that Vendor E’s charges are for the account of Vendor A (as agreed). Vendor C merely contracted with Vendor E as paymaster and agent of Vendor A in that regard. Vendor C must therefore issue a statement as contemplated in section 54(3) to Vendor A which will serve as documentary proof for any input tax claim that may be available. Vendor E’s tax invoice could also be passed on to Vendor A if required, or it can be held by Vendor C as the agent (if agreed by the parties). If any amount paid to Vendor E is shown on Vendor C’s invoice or tax invoice it must be shown as a disbursement. This applies whether funds were advanced by Vendor A to Vendor C for that purpose, or if Vendor C paid from their own funds and later recovered the exact amount outlaid on behalf of Vendor A. 

Lease and sale of non-resident owned ships, aircrafts and rolling stock in South Africa

As mentioned in the article “Recent Amendments” and “Non-resident lessors of ships, aircraft and rolling stock under a rental agreement” published in VAT Connect Issue 12 the VAT Act was amended to provide that, from 1 April 2021 the supply of ships, aircraft and rolling stock under a rental agreement by a non-resident lessor to a lessee in the Republic is no longer regarded as conducting an “enterprise” in the Republic and is specifically excluded from the definition of enterprise, subject to certain requirements being met.

Whether those requirements are complied with or not is a question of fact and does not require an interpretation of law. Only where all the requirements are met will the supply be regarded as outside the scope of VAT. Non-resident lessors and lessees in the Republic must therefore take care that any such lease agreements meet the specified requirements before treating such supplies as being outside the scope of VAT. A further issue emanating from the said amendment is that if the ship, aircraft or rolling stock concerned is subsequently sold, that supply will similarly not be regarded as a taxable supply made in the course or furtherance of an enterprise conducted in the Republic. That supply, on its own, will also not give rise to a liability for the non-resident lessor to register for VAT. It will therefore not be necessary to apply to SARS for a binding VAT ruling to confirm that outcome. 

An amendment has also been proposed to extend the non-enterprise treatment explained above to parts supplied under any rental agreement (for example, aircraft engines) which are directly in connection with the ships, aircraft or rolling stock mentioned above. If accepted, this amendment will only apply from a future date. In the meantime, and until this proposed amendment is promulgated, the Commissioner may not issue any rulings confirming that a vendor making the supplies concerned is not required to register as a vendor.

Input tax on motor cars

Whether input tax can be deducted on the acquisition of a motor car is still a recurring question we receive and Interpretation Note 82 “Input Tax on Motor Cars” was published to provide guidance on this matter. However, there has been a recent influx of requests for the Commissioner to exercise a discretion to override the prohibition of input tax on the acquisition of a motor car in certain situations. Unfortunately, the Commissioner does not have any discretion in this regard under the VAT Act. Generally, a vendor is not entitled to deduct input tax on the acquisition of a motor car, irrespective of the purpose for which the motor car is acquired. To determine whether input tax can be claimed, a vendor must first establish whether the vehicle is a “motor car” as defined. Interpretation Note 82 sets out in detail how the test works for determining whether or not a vehicle is constructed mainly for the conveyance of passengers. The outcome of the test is a question of fact and where uncertainty exists, an objective test must be applied. (That is, to determine whether the vehicle is intended mainly (more than 50%) for the carriage of passengers.)  

If the vehicle concerned qualifies as a “motor car” as defined, the input tax will be denied unless the vendor is a motor car dealer or car rental enterprise as provided in the exceptions in section 17(2)(c). Vendors should therefore not request a ruling for the Commissioner to exercise a discretion in this regard to make exceptions based on the circumstances of the vendor, as the VAT Act does not confer any such discretion upon the Commissioner to deviate from the law.

Imported services vs electronic services

Over recent years, various articles on “imported services” and “electronic services” have been published in VAT Connect as follows:

Although we have written about imported services and electronic services several times and issued various publications, we still receive some questions on how to distinguish between the two concepts so that the correct VAT treatment can be applied.

As a general background, to making the distinction, one should keep in mind the reason why the electronic services regulations were introduced, namely –

  • to deal with the difficulties involved in administering and enforcing the collection of VAT on imported services as it relies on a self-declaration by the recipient so that in many cases, the transaction will not be subject to scrutiny by SARS; and
  • to keep the VAT system in tune with modern commercial realities which recognises the worldwide trend that, increasingly, the nature of cross-border supplies into South Africa consists of digital content or access to facilities is granted by electronic means, for example, over the internet. As a result, it is considered that the VAT on those supplies could more easily be collected and administered under a separate electronic services regime which requires the VAT registration of the non-resident supplier.

Following from the above rationale, the implementation of the 2019 Electronic Services Regulations resulted in a major part of the tax base being shifted from the imported services regime into the electronic services regime. The effect being that the recipient would no longer be liable for VAT on imported services under section 7(1)(c) in respect of supplies of electronic services acquired from non-residents. Instead, the non-resident supplier would be liable to register for VAT and to collect and pay the tax to SARS on such supplies under section 7(1)(a) in the same manner as any other local vendor.

As a result, with effect from 1 April 2019, there are only a few instances where the imported services provisions will continue to apply. As a rule of thumb, if a South African resident contracts with a non-resident supplier to acquire services for non-taxable use or consumption in South Africa, the imported services provisions will only apply if the services are of the type mentioned in the 2019 Electronic Services Regulations and the value of the supplies does not exceed the R1 million VAT registration threshold. In other words, the non-resident supplier is not liable to register and account for VAT under the 2019 Electronic Services Regulations and has also opted not to register voluntarily. The effect is that the supplier will not charge VAT on this supply, but the recipient of the supply may potentially be required to pay VAT on this supply to SARS under the imported services provisions.

In regard to the explanation above, it should be noted that – 

  • VAT on imported services is only applicable to the extent that the recipient acquires the services for private, exempt, or other non-taxable purposes. Therefore, if the recipient acquired those services wholly for taxable purposes, then there would be no liability to pay VAT on imported services. There are also certain exemptions in section 14(5);
  • in determining whether the contract involves the supply of “electronic services” or not, the key factors to consider are the characteristics or nature of the supplies, and how they are delivered, for example, over the internet. If the services require physical performance in South Africa, then they are unlikely to be electronic services unless there is a mixed package of services (including electronic services) which require different forms of delivery;
  • neither the supplier nor the recipient can choose whether a supply by a non-resident should be charged with VAT under the normal rules (section 7(1)(a)) as opposed to applying the imported services provisions (section 7(1)(c)). For example, if a non-resident supplier is liable to register, charge and account for VAT on electronic services, the parties cannot choose to pay VAT on imported services instead. See the tax court case VAT 144 dated 13 March 2006 for further explanation in this regard;
  • the recipient of services supplied by a non-resident may have to ask the supplier a few questions to establish if that person is liable to register for VAT or not. This is important because the non-resident supplier (being a vendor) is liable to account for VAT on any electronic services to SARS, whereas, in the case of imported services, the recipient must self-declare the VAT and pay it over to SARS.

For further guidance in regard to distinguishing between electronic services and imported services and the associated liability to account for VAT, please refer to the Frequently Asked Questions: Supplies of Electronic Services. In particular refer to questions 66 to 68 that specifically deal with imported services.

Declaratory orders

SARS has noticed a trend recently that vendors and their consultants will approach the courts seeking relief under a declaratory order when they disagree with the outcome of their binding private ruling applications made under section 41B.  In the recent case of Mobile Telephone Networks (Pty) Ltd vs the Commissioner for the South African Revenue Service (805/2021) [2022] ZASCA 142 (the MTN case) the Supreme Court of Appeal (SCA) considered whether declaratory relief was appropriate in the circumstances of the case and provided details about the stringent requirements of the declaratory relief.

Although the main issue in the MTN case was about obtaining clarity on the correct VAT treatment of certain vouchers, the SCA had to first consider whether the declaratory order sought by MTN was appropriate.

MTN applied to SARS for a binding private ruling seeking confirmation that the sale of its pre-paid vouchers were of the type contemplated in section 10(18), however, SARS ruled that the vouchers were of the type contemplated in section 10(19). The difference between the two legal provisions is that under section 10(18) the supplier of the voucher is only liable to account for VAT at the time that the voucher is redeemed in return for a supply of goods or services, whereas, under section 10(19), the vendor supplying the voucher must account for VAT at the time the voucher is sold.

In an attempt to overturn the ruling, MTN lodged an application for a declaratory order. In considering whether declaratory relief was appropriate in this instance, the SCA considered several other previously reported matters where the courts exercised their jurisdiction to entertain similar applications. As part of the reasoning, the SCA concluded that –

  • declaratory relief in tax matters is entertained only in limited circumstances;
  • a court can only entertain an application for declaratory relief where there is, at the very least, clear and uncontested facts;
  • the submission that uncertainty was created by the inability of MTN to clearly explain the nature and functioning of a prepaid voucher had considerable merit;
  • the distinction between section 10(18) and 10(19) is clear and to determine which category the pre-paid the vouchers fall into is a factual inquiry;
  • without a set of clear, sufficient uncontested facts the SCA held that the application for declaratory relief was not appropriate in this matter.

This judgment confirms that, taxpayers who are unhappy with a ruling or decision must first consider the following before seeking a declaratory order:

  • The granting of the declaratory order is a discretionary decision exercised by the court in relation to the particular circumstances of the case; and
  • A declaratory order will only apply where the issue at hand is purely a question of law and a court will not enquire into and make findings of fact in order to answer a question of law.

Independent persons serving on boards and committees of public entities

In VAT Connect Issue 7 (December 2017) we discussed the uncertainty regarding whether an independent contractor serving on the board of a public entity that is not a company, is required to register as a vendor and charge VAT on his or her services. In this instance there are no exceptions or special rules applicable and the normal VAT rules apply to determine your liability to register for VAT and to charge VAT. The same principles explained in Binding General Rulings 40 and 41 must be applied, irrespective of whether you carry the title of non-executive director (NED) or not.

Frequently Asked Questions on BGRs 40 and 41: Non-Executive Directors (VAT and PAYE) (Issue 2) have been updated to provide clarity on this point.

For further guidance on the VAT treatment of NEDs refer to the updated VAT Quick Reference Guide for Non-Executive Directors and the Frequently Asked Questions (FAQs).

New dedicated mailbox for approval of Foreign Donor Funded Projects

Before applying for registration of a Foreign Donor Funded Project (FDFP), as a branch of an implementing agency, the implementing agent must approach National Treasury and obtain a signed letter with a unique reference number confirming the approval of the project as a FDFP for VAT purposes. This is on the basis that the Minister of Finance must approve such projects for VAT purposes.

The previous dedicated e-mail address that was available to receive such requests has been discontinued. All requests must now be submitted to [email protected].

Once the approval is received from National Treasury, a VAT registration application together with the required supporting documentation may be submitted to [email protected]. (See paragraph 5.3 of the VAT Reference Guide for Foreign Donor Funded Projects for the specific documentation required.)

For further information on this topic refer to the VAT Reference Guide for Foreign Donor Funded Projects.

SARS publications available via the SARS website

Various publications are available on the SARS website to provide taxpayers with guidance and certainty in meeting their tax obligations. Some of these publications serve as informal guidance whilst others are official publications. The publications are updated from time-to-time as and when required. Vendors should regularly access and consult our publications, as this may eliminate the need for the submission of a formal ruling application, a request for an opinion or unnecessary enquiries.

Official publications as envisaged in the Tax Administration Act, create a practice generally prevailing. The following official publications can be accessed on the Legal Advisory landing page on the SARS website under “Legal Counsel”.

  • Binding General Rulings (BGRs) are issued regarding the interpretation of the VAT Act in respect of a specific transaction of general public interest, or that affects a specific industry, under specific circumstances. BGRs may be cited by SARS or any person in any proceedings, including court proceedings. A register of all Binding General Rulings is also available on the SARS website under the Legal Counsel page.
  • Interpretation Notes provide guidance on the application of the VAT Act on the VAT consequences of supplies of goods or services, or specific transactions. A

In addition to the official publications, the following published documents on the SARS website are also available to assist taxpayers in the practical implementation and the application of the requirements under the law as well as to provide informal guidance on specific topics:

These documents can be accessed via the “Legal Counsel publications” tab under “Legal Counsel” on the SARS website.

Various external guides of an operational nature are available on the VAT landing page on the SARS website which can be accessed via the “Type of Tax” tab. These external documents provide simplified step-by-step guidelines to vendors to complete certain processes or forms. Some examples of these guides are VAT-REG-02-G01 – Guide for Completion of VAT application – External Guide and VAT-REG-02-G02 – Foreign Suppliers of Electronic Services – External Guide.


Since the last issue of VAT Connect, the following documents impacting on VAT have been published on the SARS website (Refer to the “Legal Counsel” page).

Binding General Rulings (BGRs)

Interpretation Notes (INs)




VAT Connect is an information guide and not an “official publication” as defined in section 1 of the TA Act and accordingly does not create a practice generally prevailing under section 5 of that Act. It is also not a binding general ruling (BGR) under section 89 of Chapter 7 of the TA Act nor a ruling under section 41B of the VAT Act. For general enquiries regarding VAT call the SARS Contact Centre on 0800 00 7277. Should there be any aspects relating to VAT on which a specific VAT ruling is required, you may apply for a ruling by completing form VAT301 and sending it together with all the necessary information to SARS by facsimile on +27 86 540 9390 or by e-mail to [email protected]. Refer also to the Quick Reference Guide on VAT Ruling Application Procedure for more details on how to apply for a ruling.

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