Ricochet News

What the VAT is going on? Here's how to navigate VAT increase

By Patrick Emmett – Senior Tax Consultant, Mazars Port Elizabeth - Mar 29, 2018
What the VAT is going on? Here's how to navigate VAT increase

Now that the initial anxiety following the announcement of the increase in the VAT rate to 15% in the 2018 Budget Speech has died down, the underlying concern with regards to its practical application and implementation has risen to the fore.

The rate change, which will come into effect from 1 April 2018, has left taxpayers with very limited time to adequately adjust.  Taxpayers need to understand how the change impacts them, and implement the required system and control changes to adequately account for the change.

Outlined below is a high-level discussion of the transitional rules of the rate change.

Date of transaction

The date of the transaction plays a critical role in determining which VAT rate to apply and in which period it should be accounted for. Section 9 of the VAT Act contains the time of supply rules, determining when the transaction is deemed to occur for VAT purposes.

The general rule for the time of supply of any goods or services is the earlier of when an invoice is issued by the supplier or any payment of consideration is received by the supplier in respect of the supply.

The word “invoice” is defined in section 1 of the VAT Act as “a document notifying an obligation to make payment”.

Further, the payment of a deposit is not considered a payment of consideration.

The specific time of supply rules as contained in section 9 of the VAT Act include, among others, the following:

  • transactions between connected persons – when goods are removed or made available, or when services are performed;
  • rental agreements or the supply of services under an agreement which provides for periodic payments – deemed to be successively supplied, and each successive supply shall be deemed to take place when a payment becomes due or is received, whichever is earlier;
  • construction related supply of goods or services -  deemed to be successively supplied, and each successive supply shall be deemed to take place when a payment becomes due, is received, or any invoice relating only to that payment is issued, whichever is the earliest;
  • instalment credit agreement – when the goods are delivered or the time any payment of consideration is received by the supplier, whichever is earlier; and
  • fixed property – when transfer is registered in the deeds registry or any payment is made for such supply, whichever date is earlier.

Accordingly, where the time of supply occurs prior to 1 April 2018, VAT should be accounted for at 14%. Conversely, where the time of supply occurs post 1 April 2018, VAT should be accounted for at 15%.

The issue that arises though, is how to account for VAT where goods are delivered, or services are rendered before 1 April 2018 (or both before and after 1 April 2018) but the time of supply is deemed to occur after 1 April 2018.

Fortunately, the VAT Act contains transitional rules which deal with the above issue.

Transitional rules

Section 67A of the VAT Act contains rules that outline which rate of VAT to use in certain situations where the time of supply will be deemed, in terms of section 9 of the VAT Act, to occur after 1 April 2018.

  • Goods provided or services performed prior to 1 April 2018

Where goods are provided or services are performed prior to 1 April 2018 VAT at the rate of 14% will apply, despite the fact that an invoice for the supply may be issued and payment received after 1 April 2018. This provision does not apply to the supply of fixed property, which is dealt with separately below.

  • Goods provided or services performed before, and ending on or after 1 April 2018

Where goods are provided or services are performed over a period which commences before, and ends on or after 1 April 2018, the value of the supply needs to be apportioned between the supplies which occurred before 1 April 2018 and those which occurred on or after 1 April 2018.

This apportionment should be made on a fair and reasonable basis and allocated accordingly, with the onus resting on the taxpayer to prove this. For the supplies relating to the period before 1 April 2018, VAT of 14% will apply, and for those supplies on or after 1 April 2018, VAT of 15% will apply.

  • Goods provided or services actually performed on or after 1 April 2018 in respect of contracts concluded between 21 February 2018 and 31 March 2018

Section 67A of the VAT Act contains anti-avoidance rules which are designed to prevent VAT vendors from triggering the time of supply rules before 1 April 2018 in order to take advantage of the 14% VAT rate, but where the actual supplies occur after 1 April 2018.

The anti-avoidance rule will apply to any transaction where the time of supply is triggered between 21 February 2018 and 31 March 2018 and the goods are only provided 21 days after 1 April 2018 (i.e. from 23 April 2018 onwards) or the services are performed after 1 April 2018. In these instances, the supply is deemed to occur on 1 April 2018 and VAT of 15% will apply.

The anti-avoidance provisions will however not apply where it is the usual business practice for payment to be made or invoices to be issued before supplies are made.

  • Supply of residential fixed property

VAT of 14% may apply to the sale of residential fixed property even where the supply is deemed to be made on or after 1 April 2018 due to the transfer being registered or payment being made on or after that date.

This rule will only apply to supplies on or after 1 April 2018 where the contract for the supply of the residential fixed property is concluded before 1 April 2018, and the VAT inclusive price was included as such in the agreement.

For the purposes of section 67A residential property includes a dwelling and any land on which it is erected, any real right to a dwelling, any sectional title unit which comprises a dwelling, a share in a share block company which confers the right to or interest in the use of a dwelling, land which is acquired for the sole purpose of the erection 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.

  • Lay-by agreements

VAT on lay-by agreements concluded before 1 April 2018, where the deposit required to set the goods aside is paid before that date, will be accounted for at a rate of 14%. If the lay-by agreement is subsequently cancelled, VAT is calculated by applying the tax fraction of 14/114 on any amount retained by the supplier.

Where the lay-by agreement is concluded after 1 April 2018, VAT of 15% is accounted for. Where these agreements are subsequently cancelled the new tax fraction of 15/115 must be used to calculate the VAT to be accounted for on any amount retained by the supplier.