Welcome to the latest edition of VAT Connect, the electronic newsletter for vendors that keeps you up to date with the tax matters that affect you.
Since the last issue of VAT Connect (September 2015), various amendments affecting the VAT Act and the administration thereof have been made. For more details on recent amendments, refer to the following documents, amongst others, on the Legal Counsel webpage:
- Taxation Laws Amendment Acts for 2015 and 2016 (Act 25 of 2015 and Act 15 of 2016);
- Tax Administration Laws Amendment Acts for 2015 and 2016 (Act 23 of 2015 and Act 16 of 2016); and
- Explanatory Memoranda on the 2015 and 2016 Amendment Acts.
You can also read a summary of some of the 2015 amendments in the Preface of the VAT 404 – Guide for vendors. Discussion on the 2016 amendments will be included in the next update of the VAT 404 – Guide for vendors, which is expected later this year.
In addition to the above, amendments contained in the 2017 Draft Taxation Laws Amendment Bill (TLAB) and the 2017 Draft Tax Administration Laws Amendment Bill (TALAB) as well as the accompanying Explanatory Memoranda were published for public comment on 14 July 2017. These bills provide the necessary legislative amendments required to implement tax proposals that were announced in the Budget on 22 February 2017. The Draft TLAB deals with more substantive changes to the tax laws, while the Draft TALAB deals with administrative provisions of tax legislation currently administered by SARS, including the TA Act.
The 2017 Draft TLAB and Draft TALAB as well as the Explanatory Memoranda can be found under “Draft documents for public comment” on the Legal Counsel webpage.
The supply of goods, which are to be exported from South Africa, may be subject to VAT at the zero rate provided certain requirements are met, as follows:
- Direct exports – this is set out in Interpretation Note 30 (Issue 3) dated 5 May 2014
- Indirect exports – this is regulated by the Export Regulation, which was published on 2 May 2014 in Government Gazette (GG) 37580 (the Export Regulation).
The above documents can be found on the SARS website on the Legal Counsel webpage.
Generally, the prescribed period within which goods must be exported is 90 days for both direct and indirect exports. As a general rule, the 90-day period is calculated from the earlier of the time that an invoice is issued or any payment is received in respect of the supply. Certain exceptions are, however, applicable. For example, the supply of goods, which still have to be manufactured or assembled, must be exported from South Africa within 90 days from the date of completion of the manufacturing or assembly process.
A further exception is that the Commissioner may extend the period within which the goods must be exported when there are circumstances beyond the control of the vendor or when commercial difficulties or delays are experienced in the process of exporting the goods. In order to extend the 90-day period for export, the vendor exporting the goods must submit an application to the Commissioner for a binding private or class ruling. The application must be submitted before the 90-day period has expired.
If a vendor failed to apply for an extension within the 90-day period allowed, a further 30-day period may be allowed within which to submit the application. However, in such a case, the application must contain the reasons why the request for extension could not be submitted within the prescribed 90-day period. The Commissioner will consider the reasons and apply his discretion as to whether the application can be accepted or not. If the person did not apply within the prescribed 90-day period, or within the further 30-day period which may be allowed, the Commissioner cannot apply any further discretion in the matter. As a result, VAT will have to be accounted for on the supply of the goods.
Vendors are entitled to deduct input tax and make other deductions from their output tax liability provided that the required documentary proof is held. However, a vendor may sometimes experience difficulty in obtaining the correct documentation from its suppliers despite repeated requests for the documentation. As a result some vendors have been denied the benefit of input tax deductions due to the lack of co-operation of their suppliers.
In order to provide some relief in this regard, section 16(2)(g) was introduced, which allows the vendor to apply for a ruling under certain circumstances for permission to deduct input tax or any other deductions, based on documentary proof acceptable to the Commissioner. This dispensation applies to tax periods commencing on or after 1 April 2016 and may only be invoked as a last resort after all reasonable measures have been taken by the vendor to obtain the correct documentation from the supplier or other person.
The circumstances under which the Commissioner may consider granting relief under section 16(2)(g) are set out in Binding General Ruling (BGR) 36 dated 24 October 2016 as follows:
The vendor must –
- have sufficient proof that reasonable attempts were made to obtain the documentary proof required under section 16(2)(a) to (f);
- have been unable to get the documentation prescribed under said provisions due to circumstances beyond the vendor’s control; and
- not be able to deduct input tax or make any other deduction under any other provision of the VAT Act based on the particular document in the vendor’s possession.
In order to obtain the Commissioner’s approval to use alternative documentary proof to substantiate a deduction under section 16(2)(g), the vendor must submit a request to the Commissioner for a VAT ruling to be issued under section 41B. The ruling request must be made in writing and sent by e-mail to [email protected] or by facsimile to 086 540 9390. The application must include a completed form VAT301 and clearly motivate the reasons why the Commissioner should invoke the relief under section 16(2)(g). The application must comply with the provisions of section 79 of the Tax Administration Act 28 of 2011, excluding section 79(4)(f), (k) and (6). Refer to BGR 36.
With regard to alternative documentary proof in respect of a deduction as contemplated in section 16(3)(c) to (n) (other deductions which do not require the issuing of a tax invoice), a vendor seeking to rely on the use of alternative documentary proof for these deductions, must demonstrate and substantiate the circumstances beyond the vendor’s control giving rise to the vendor’s difficulty in obtaining the documentary proof prescribed by the Commissioner as set out in Interpretation Note 92.
Remember that the vendor must be in possession of the relevant approval granted by the Commissioner as well as the relevant documents that will serve as acceptable proof to the Commissioner at the time that the return in which the deduction is made is submitted.
Refer to BGR 36 for further information.
In order for the sale of an enterprise to qualify for the zero rate under section 11(1)(e), the following requirements must be met at the time of concluding the agreement:
- The seller and purchaser must be registered vendors.
- The supply must consist of an enterprise or part of an enterprise that is capable of separate operation.
- The parties must agree in writing that the enterprise is disposed of as a going concern.
- The seller and purchaser must agree in writing that such enterprise or part thereof will be an income-earning activity on the date of transfer thereof.
- The seller must dispose of all the assets that are necessary for carrying on the enterprise to the purchaser.
- The parties must agree in writing that the consideration for the supply includes VAT at the zero rate.
It has come to our attention that in some instances, transactions that do not meet the requirements of section 11(1)(e), are treated as zero-rated going concerns by vendors. One of the main requirements for the sale of an enterprise to qualify as a going concern is that the income-earning activity of the business must be transferred together with all the assets that are necessary for conducting the enterprise. The following are some examples of transactions involving fixed property that would not qualify as going concerns, which highlight the issues of concern in this regard:
- Tenanted residential properties – A person carrying on a residential leasing business is making exempt supplies and is not carrying on an enterprise to that extent, even if the person is registered for VAT in respect of other taxable supplies made. The sale of a residential property that is occupied by a tenant, or the sale of the residential leasing business cannot be zero-rated under section 11(1)(e) as the person is not supplying an “enterprise” as defined.
- Termination of leases before the enterprise is transferred – A vendor that conducts a commercial leasing activity cannot sell the rental income-earning enterprise as a zero-rated going concern if the leases are terminated before the transfer takes place. In this case, only the property is sold and the income-earning activity (the enterprise) is not supplied together with the property.
- Agreement merely constitutes the sale of property – In many cases it is found that the agreement merely refers to the sale of property. In order to qualify as the sale of a going concern, which is taxable at the zero rate, the subject of the sale must be an enterprise or part thereof, which is capable of separate operation and not merely the property.
- Fictitious or non-existent leases – In some cases it has been found that the agreement of sale includes all the requirements to qualify as a going concern, but upon further enquiry it is established that in fact no leases are in place. Such cases fall into two categories. First there are those where it was the intention of the seller to have the rental income-earning activities in place, but for some reason this did not take place as planned, and the agreement was not amended accordingly. The second category is when the factual position has deliberately been misrepresented in the agreement by the parties. In these cases, there is no income-earning activity being transferred and the zero rate under section 11(1)(e) cannot apply.
It is therefore important to take extra care to ensure that the requirements are met when fixed property is included in the assets of the enterprise being sold. The consequences of not complying with the requirements can lead to a substantial amount of understatement penalties being imposed by SARS as well as penalties and interest for late payment of tax. Additional costs such as legal fees, administration fees and additional conveyancing costs might also be incurred by the parties to rectify the situation. Lastly, it should be kept in mind that failure to comply with the requirements for a going concern could lead to a dispute between the contracting parties as to whether or not the agreed purchase price includes VAT at the standard rate. Alternatively, if the transaction turns out not to be a taxable supply for VAT purposes, the purchaser will be liable to pay transfer duty on the property acquired.
For more detail about going concerns, refer to Interpretation Note 57 and the VAT 404 – Guide for vendors.
On 10 February 2017 SARS published two BGRs concerning the VAT and employees’ tax (PAYE) treatment of directors’ fees earned by non-executive directors (NEDs). The rulings were issued to clarify the correct application of the law in respect of a long-standing uncertainty as to whether directors’ fees should be subject to PAYE, VAT or both. This uncertainty is not unique to South Africa, but has also been experienced in a number of other countries.
BGR 40 deals with the question as to whether NEDs are liable to have PAYE deducted from their fees and certain matters concerning the ability of the NED to claim certain deductions for income tax purposes. BGR 41 deals with the question as to whether NEDs are acting in the capacity of “employees” when they carry out their NED duties, or if they carry on an enterprise as independent contractors in the Republic, and consequently, whether they must register and charge VAT on their fees.
A media release was issued on 17 February 2017 to explain some of the consequences of the BGRs. However, as a result of some further questions from the public, BGR 41 was updated on 4 May 2017 and a further media release was issued on 5 May 2017 to provide further clarity on the practical application of the law.
BGR 41 has therefore confirmed the tax policy position that NEDs carry on their activities in the form of an “enterprise” as contemplated in the VAT Act. Consequently, NEDs will be liable to register if the value of their taxable supplies (for example, directors’ fees earned) exceeds the registration threshold of R1 million in any consecutive 12-month period. Following from this conclusion, and considering the uncertainty that has been experienced on the question of the liability to register for VAT, the Commissioner has decided that a later date of registration can be accepted for certain NEDs, provided the requirements as set out in BGR 41 are met. This decision applies regardless of whether the fees earned by the NED were subject to PAYE or not.
In summary, the effect of BGR 41 insofar as the liability of NEDs to register and account for VAT is as follows:
- An NED who is liable to register and account for VAT must do so by no later than 1 June 2017.
- In the case of an NED that was registered for VAT before 1 June 2017 for other activities, but did not charge or account for VAT on the directors’ fees as required, that person must commence charging and accounting for VAT on such fees, which are received or invoiced, on or after 1 June 2017.
In either of the above two cases, the NED may have chosen to register and account for VAT on directors’ fees from an earlier date. This would occur, for example, if the NED applied for registration on the basis that the liability to register and account for VAT on such fees was previously acknowledged, or if that person registered voluntarily in that regard from such earlier date – in which case, the earlier date will apply.
You can read more about this topic by referring to BGR 40 and BGR 41 as well as the accompanying media releases dated 14 February 2017 and 5 May 2017. Further guidance has also been provided in the form of a Draft VAT quick reference guide for non-executive directors and Frequently Asked Questions (FAQs). The guide has been published for comment by 15 September 2017 and will be finalised after the comments period. The FAQs will be subject to ongoing revision and will be updated as and when new questions and answers need to be included.
Public Notice 748 (published on 24 June 2016 in GG 40088) (the Public Notice), which sets out the additional considerations under section 80(2) of the TA Act that can be taken into account in deciding if an application for a binding private or a binding class ruling may be rejected, has been updated.
The following additional considerations applicable to VAT rulings, which may lead to the rejection of a VAT ruling application, were added:
- The entitlement to deduct input tax in respect of goods or services (or both) acquired by a person who is not a party to the application.
- Confirmation that the issuing of a tax invoice, debit or credit note complies with the requirements imposed by any law relating to electronic communications, or that any technical requirements are met in respect of electronic invoicing.
- Confirmation that a supply of accommodation or any right to occupy a building or part thereof constitutes “commercial accommodation”.
- Confirmation that a supply by a welfare organisation to a public authority or a municipality qualifies for the zero rate under section 11(2)(n).
As a general consideration applicable to all the relevant taxes mentioned in the Public Notice, a ruling application may be rejected if the applicant has not rendered all tax returns or paid all taxes due, unless arrangements acceptable to SARS have been made.
Refer to the Public Notice on the Legal Counsel webpage for more detail regarding the “no rulings list”.
The VAT Act includes specific requirements on the issuing of tax invoices, debit and credit notes, and the storage of these documents. Chapter 4 of the TA Act sets out the details of the form in which records must be kept (including electronic form) and the period for which documents should be retained. The requirements to issue and retain documents are equally applicable to vendors that do “e-invoicing”. Vendors do not need prior approval from the Commissioner to implement e-invoicing. However, it should be noted that generally the electronic transmission and retention of documents is regulated by the Electronic Communications and Transactions Act 25 of 2002 (ECT Act). SARS is not in a position to issue rulings or provide advice on whether any Electronic Data Interchange (EDI) systems or any other electronic communications meet the technical specifications of the ECT Act. This aspect is also included in the list of additional considerations per the Public Notice referred to under the article “Additional considerations in respect of rulings (“No rulings list”)”. Any application for a VAT Ruling relating to the aforementioned can therefore not be dealt with and will accordingly be rejected.
Since the last issue of VAT Connect, the following VAT documents have been published Legal Counsel webpage:
Interpretation Notes (INs)
- IN 31 (Issue 4): Documentary proof required for the zero-rating of goods or services – dated 9 March 2016
- IN 39 (Issue 3): VAT treatment of public authorities and grants – dated 29 March 2017
- IN 40 (Issue 3): VAT treatment of the supply of goods and/or services to and/or from a Customs Controlled Area of an Industrial Development Zone – dated 24 March 2016
- IN 42 (Issue 2): The supply of goods and/or services by the travel and tourism industry – dated 12 December 2016
- IN 92: Documentary proof prescribed by the Commissioner – dated 24 October 2016
Binding General Rulings (BGRs)
- BGR 11 (Issue 2): Use of an exchange rate – dated 23 February 2016
- BGR 12 (Issue 2): Input tax on the acquisition of a non-taxable supply of second-hand motor vehicles by motor dealers – dated 25 February 2016
- BGR 14 (Issue 2): VAT treatment of specific supplies in the short-term insurance industry – dated 18 March 2016
- BGR 27: Application of sections 20(7) and 21(5) – dated 26 March 2015
- BGR 28 (Issue 2): Electronic services – dated 23 February 2016
- BGR 32: VAT treatment of specific supplies in the short-term reinsurance industry – dated 18 March 2016
- BGR 33: The VAT treatment of the supply and importation of vegetable oil – dated 24 March 2016
- BGR 36: Circumstances prescribed by the Commissioner for the application of section 16(2)(g) – dated 24 October 2016
- BGR 37: Zero-rating of international travel insurance – dated 12 December 2016
- BGR 38: The value-added tax treatment of the supply and importation of vegetables and fruit – dated 23 January 2017
- BGR 39: VAT treatment of municipalities affected by municipal boundary changes – dated 27 January 2017
- BGR 41: VAT treatment of non-executive directors (Issue 2) – dated 4 May 2017 (which must be read with BGR 40: Remuneration paid to non-executive directors – dated 10 February 2017)
- BGR 43: Deduction of input tax in respect of second-hand gold – dated 12 September 2017
- VAT 404 – Guide for vendors – dated 24 January 2017
- VAT 409 – Guide for fixed property and construction – dated 27 September 2016
- VAT 411 – Guide for entertainment, accommodation and catering – dated 25 February 2016
- VAT 412 – Guide for share block schemes – dated 18 March 2016
- VAT 414 – Guide for associations not for gain and welfare organisations – dated 10 March 2016
- VAT 419 – Guide for municipalities – dated 30 March 2017
- VAT 420 – Guide for motor dealers – dated 28 September 2016
- VAT 421 – Guide for short-term insurance – dated 12 December 2016
- Transfer duty guide – dated 28 September 2016
- Draft VAT quick reference guide for non-executive directors – dated 18 August 2017
- VAT and PAYE – Non-executive directors – FAQs on BGRs 40 and 41
VAT Connect is an information guide and not a binding general ruling for purposes 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.