The minister of finance announced in his budget speech on February 21 2018 that the standard rate of value added tax (VAT) will increase from the current rate of 14% to 15% from April 1 2018.
Unfortunately, the introduction date of the new rate leaves vendors little time to amend their systems and implement procedures to ensure that VAT is correctly accounted for from that date. There is also uncertainty as to when supplies still qualify for VAT at 14% and when VAT should be levied at 15%. The VAT Act sets out specific rules regarding a VAT rate change and the rate of VAT which should apply to goods or services supplied during the transitional period. These rules are outlined below.
Entitlement to alter contract price
Section 67 of the VAT Act deals with the situation where an agreement was entered into before April 1 2018. It entitles the supplier to recover from the recipient – in addition to the amounts payable by the recipient to the vendor as stipulated in the agreement – the additional VAT that becomes payable on supplies on or after April 1 2018 as a result of the VAT rate increase, unless the agreement stipulates otherwise. The supplier will nevertheless be required to pay VAT at 15% on such supplies, irrespective of whether the supplier recovers the additional consideration from the recipient.
The transitional rules dealing with a VAT rate increase are set out in Section 67A and are outlined below.
Supplies before April 1 2018 Where goods (excluding fixed property supplied by way of a sale) are provided before April 1 2018, or where services are performed during a period commencing and ending before April 1 2018, the rate of 14% will apply to these supplies, irrespective of the fact that an invoice for such supplies may be issued only after April 1 2018 and payment is received after that date.
Goods are deemed to have been provided when they are delivered to the recipient. It is unclear what is meant by 'delivery', but the concept seems wider than just physical delivery and includes 'delivery' in the legal sense. Goods that are supplied under a rental agreement are deemed to have been provided when the recipient takes possession or occupation thereof.
However, there is no guidance as to when services are deemed to have been performed. It seems that services which have been carried out or physically performed are considered to have been performed.
Supplies commencing before and ending on or after April 1 2018 The rules regarding the supply of goods or services commencing before and ending on or after April 1 2018 are set out in Section 67A(1)(ii) and cover:
- goods that are provided under a rental agreement;
- services which are performed under an agreement or law that provides for periodic payments;
- goods supplied progressively or periodically under an agreement or law that provides for the consideration to be paid in instalments or periodically; and
- goods or services supplied directly in the construction, repair, improvement, erection, manufacture, assembly or alteration of goods under any agreement or law that provides for the consideration to be paid in instalments or periodically.
Where these goods are provided or services are performed during a period that commences before April 1 2018 and ends thereafter, the vendor must apportion the value of the supply (ie, the VAT exclusive price charged) on a fair and reasonable basis between the supplies made before April 1 2018 and supplies made on or after that date. VAT is then payable at the rate of:
- 14% on the value attributed to supplies made before April 1 2018; and
- 15% on the value attributed to supplies on or after that date.
There are no guidelines as to the basis of apportionment which must be used. The onus is on the vendor to prove that the apportionment applied is fair and reasonable in the circumstances.
Supplies made after April 1 2018 Generally, where supplies are made on or after April 1 2018, such supplies will be subject to VAT at 15%. However, to prevent vendors from taking advantage of the lower rate by triggering the time of supply rules in Section 9 of the VAT Act during the period after the increase in the VAT rate was announced (ie, February 21 2018) but before April 1 2018, where the actual supplies of the goods or services are made only after this date, Section 67A(2) contains certain anti-avoidance rules that override Section 9.
The anti-avoidance rules apply where goods (excluding the sale of residential property) or services are agreed to be supplied between February 21 2018 and March 31 2018, but the goods or services are actually provided 21 days after April 1 2018 (ie, after April 22 2018) or the services are performed on or after April 1 2018. Such supplies are deemed to have taken place on April 1 2018 and VAT at the rate of 15% will apply. The VAT must then be accounted for in the April 2018 tax period, irrespective of when the goods are provided or the services are performed. Therefore, if the goods are provided within the 21-day period (ie, before April 22 2018) VAT will still be payable at 14%.
The anti-avoidance rules will not apply where it is the normal business practice for the vendor to receive payments or issue invoices before goods are provided or services are performed (eg, a professional body that customarily issues invoices to its members for annual subscriptions).
Section 67A(4) of the VAT Act provides for a concession in regard to sales of the following types of residential properties:
- fixed property consisting of any dwelling and the land on which it is erected;
- any real right conferring a right of occupation of a dwelling;
- any sectional title unit where such unit comprises a dwelling;
- any share in a share block company that confers a right to or interest in the use of a dwelling;
- fixed property consisting of land for the sole or principal purpose of the erection by or for the purchaser of a dwelling as confirmed by the purchaser in writing; or
- the construction by a vendor carrying on a construction enterprise of any new dwelling.
Except where it is used in the supply of commercial accommodation, a 'dwelling' is defined as any building, premises, structure or any other place, or any part thereof, used predominantly as a place of residence or abode of any natural person or which is intended for such use, including fixtures and fittings belonging thereto.
If the price of the sale or construction of such property was determined and stated in a sale agreement which was signed by the parties thereto before April 1 2018 and the registration of transfer and payment will take place only on or after April 1 2018, then VAT is payable at the rate of 14%.
As no special transitional rules relating to commercial property exist, the normal time of supply rule determines the applicable rate of VAT. Consequently, if the date of registration of transfer in the name of the purchaser is effected and the seller is paid on or after April 1 2018, VAT at the rate of 15% will be payable by the seller, irrespective of when the sale agreement was concluded.
Where a lay-by agreement is concluded before April 1 2018, VAT at the rate of 14% will be payable on the supply in terms of such an agreement, provided a deposit is paid before April 1 2018. If such an agreement is cancelled before the supply is made, the supplier must account for VAT on any amount retained at the tax fraction applying the rate of 14%.
Supplies made under any lay-by agreements concluded after April 1 2018 are subject to VAT at 15%, and any amounts retained under such cancelled agreements will attract VAT at the tax fraction applying the rate of 15%.
Transactions for which the transitional rules are unclear or substantial practical difficulties will likely emerge. As the South African Revenue Service is unlikely to have sufficient resources available to provide clarification by way of rulings to vendors before April 1 2018, careful consideration and a prudent practical approach will be required to avoid any penalties and interest from such transactions.
For further information on this topic please contact Gerhard Badenhorst at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email ([email protected]). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.
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