VAT Regulations dealing with the supply of electronic services

Since 2015, foreign suppliers of electronic services (such as audio-visual content, e-books etc.) in South Africa are deemed to operate an enterprise for VAT locally. Although the regime has been in place for several years, new regulations in this regard are continuously published, the latest being on 18 March 2019, with an effective date of 1 April 2019. Along with the new regulations, SARS has published a “FAQ” document that addresses some of the questions that vendors and the public at large are likely to have about the implications of the updated regulations and recent legislative amendments. Below, we explore some of the more pertinent matters that SARS addresses in the “FAQ” document.

What are electronic services?

Electronic services mean any services supplied by a non-resident for consideration using –

· an electronic agent;
· an electronic communication; or
· the internet.

Electronic services are therefore services, the supply of which –

· is dependent on information technology;
· is automated, and
· involves minimal human intervention.

Simply put, this means that from 1 April 2019, you will have to pay VAT on a much wider scope of electronic services. The regulations now include any services that qualify as “electronic services” (other than a few exceptions) whether supplied directly by the non-resident business or via an “intermediary”.

Some examples include:

· Auction services;
· Online advertising or provision of advertising space;
· Online shopping portals;
· Access to blogs, journals, magazines, newspapers, games, publications, social networking, webcasts, webinars, websites, web applications, web series; and
· Software applications downloaded by users on mobile devices.

What is specifically excluded from the ambit of electronic services in the updated regulations?  

Excluded from the updated regulations are –

· telecommunications services;
· educational services supplied from an export country (a country other than South Africa), which services are regulated by an education authority under the laws of the export country; and
· certain supplies of services where the supplier and recipient belong to the same group of companies.

What is the reason for the updated regulations?   The original regulations limited the scope of services that qualified as electronic services, and which must be charged with VAT at the standard rate. The intention of the updated regulations is to substantially widen the scope of services that qualify as electronic services, so that all services supplied for a consideration (subject to a few exceptions), which are provided by means of an electronic agent, electronic communication or the internet, are electronic services and must be charged with VAT at the standard rate.
Do the updated Regulations make a distinction between Business-to-Business (B2B) and Business-to-Consumer (B2C) supplies?   No, there is no distinction between B2B and B2C supplies, therefore, B2B supplies will be charged with VAT at the standard rate. This outcome was intentional as the South African VAT system does not fully subscribe to the B2B and B2C concepts.  
What are some examples of supplies that are not electronic services?  

· Certain educational services
· Certain financial services for which a fee is charged
· Telecommunications services
· Certain supplies made in a group of companies
· The online supply of tangible goods such as books or clothing
· Certain supplies or services that are not electronic services by their nature, but where the output and conveyance of the services are merely communicated by electronic means, for example:

  • a legal opinion prepared in an export country, sent by e-mail; and
  • an architect’s plan drawn up in an export country and sent to the client by e-mail.
Given the much wider scope of application for electronic services, both local and foreign vendors need to ensure that VAT is levied at the appropriate rate on the supply of electronic services – and local vendors, where relevant, need to retain the necessary supporting documents to substantiate any input tax claims.
 
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)
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Bad debts and VAT

While there is currently a focus on the income tax considerations of bad and doubtful debts (given that National Treasury has proposed changes to section 11(j) of the Income Tax Act[1] to allow for an allowance of 25% of impairments in respect of doubtful debts), the Value Added Tax (VAT) aspect of bad debts is often overlooked.

Section 22 of the Value Added Tax Act[2] determines that a VAT vendor who accounts for VAT on the invoice basis may deduct input tax in respect of debts which have become irrecoverable and written off. To be able to claim the input tax deduction, three requirements should be met:

  1. There must have been a taxable supply for a consideration in money;
  2. The vendor must have already properly accounted for the output VAT on that supply; and
  3. The vendor must have written off the amount of the consideration that has become irrecoverable.

The first two requirements should be relatively easy to meet since they generally occur in the ordinary course of business. The final requirement may potentially be more difficult to substantiate.

The VAT Act does not provide any further guidance on what constitutes “irrecoverable” or “written off”. A similar hurdle is present in the Income Tax Act, that does not elaborate on what the meaning is of debt that has become “doubtful” and debt that has “become bad”. Arguably, the requirements in the VAT Act stating that the debt must be “written off”, goes a step further than debt that is merely “doubtful” or that has “become bad”. It is also not certain to what extent the South African Revenue Service could draw comparisons between how a taxpayer treated the same debt for income tax and VAT purposes. Taxpayers should, therefore, exercise caution when they attempt to claim the allowable input tax and ensure that the facts support a case for a debt that has been written off. The input tax that can be claimed is equal to the tax fraction (15/115) applied to the amount actually written off.

Importantly though, if a vendor has success in recovering a portion of the debt previously written off, this must again be accounted for as output tax. Taxpayers that form part of a group of companies should also note that if the debt has been written off between wholly-owned members, the additional input tax is not allowed.

  • [1] 58 of 1962 (the Income Tax Act)
  • [2] 89 of 1991 (the VAT Act)

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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How the VAT increase affects your business

Consumers and suppliers have by now had an opportunity to familiarise themselves with the increased Value-Added Tax (VAT) rate of 15% since 1 April 2018. There are however many technical considerations related to the increase that remain unclear. One such an uncertainty is with regards to deposits paid prior to the effective date of the increase, while goods and services are only rendered thereafter.

VAT vendors often require that consumers pay a deposit to secure the future delivery of goods or services (for example, an advance payment for the manufacture of goods, bookings in advance for holidays or accommodation etc.). The deposit paid by the consumer is then off-set against the full purchase price once they eventually receive the goods or services. The question arises what VAT rate the consumer will finally be subject to, where they paid a deposit before 1 April 2018, but the actual delivery of goods or services only takes place thereafter.

The answer to this question is found in the time of supply rules contained in section 9 of the Value-Added Tax Act.[1] In terms thereof, the “time of supply” of goods and services is at the time an invoice is issued by a supplier, or the time any payment of consideration is received by the supplier, whichever is the earlier. Two important concepts stem from this rule.

Firstly, an “invoice” needs to be issued by a supplier. In terms of section 1 of the VAT Act, an “invoice” is a document notifying someone of an obligation to make payment. It is therefore not necessary that a “tax invoice” – which has very specific requirements – needs to be issued. If consumers received only a “booking confirmation”, “acknowledgment of receipt” or similar document prior to 1 April 2018 that did not demand payment (such as tax invoice or pro-forma invoice), the time of supply was not triggered, and consumers will be subject to the 15% VAT rate once the goods or services are finally delivered after 1 April 2018.

Secondly, any deposit that was paid by the consumer, would have had to be applied as “consideration” for the supply of the goods or services to constitute “payment”. In this regard, consumers are largely dependent on how VAT vendors account for deposits in their financial systems. If deposits are accounted for separately (which is often the case with refundable deposits or where there are conditions attached to the supply) and only recognised as a supply when goods or services are received by the consumer, the deposit (although a transfer of money has occurred), would not constitute “payment”. For example, the time of supply may only be triggered once a guest has completed their stay at a guest house after 1 April 2018, resulting in VAT being levied at 15%.

The take away from the time of supply rules is therefore that payment of a deposit prior to 1 April 2018 does not necessarily result in a supply at 14% VAT and the rate to be applied is dependent on the specific facts of each case. Both consumers and VAT vendors should also take note that there are a number of rate specific rules that apply during the transition phase, and are encouraged to seek advice from a tax professional when they are in doubt about the rate to be applied.

[1] 89 of 1991 (the “VAT-Act”)

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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How the VAT increase affects your business

Consumers and suppliers have by now had an opportunity to familiarise themselves with the increased Value-Added Tax (VAT) rate of 15% since 1 April 2018. There are however many technical considerations related to the increase that remain unclear. One such an uncertainty is with regards to deposits paid prior to the effective date of the increase, while goods and services are only rendered thereafter.

VAT vendors often require that consumers pay a deposit to secure the future delivery of goods or services (for example, an advance payment for the manufacture of goods, bookings in advance for holidays or accommodation etc.). The deposit paid by the consumer is then off-set against the full purchase price once they eventually receive the goods or services. The question arises what VAT rate the consumer will finally be subject to, where they paid a deposit before 1 April 2018, but the actual delivery of goods or services only takes place thereafter.

The answer to this question is found in the time of supply rules contained in section 9 of the Value-Added Tax Act.[1] In terms thereof, the “time of supply” of goods and services is at the time an invoice is issued by a supplier, or the time any payment of consideration is received by the supplier, whichever is the earlier. Two important concepts stem from this rule.

Firstly, an “invoice” needs to be issued by a supplier. In terms of section 1 of the VAT Act, an “invoice” is a document notifying someone of an obligation to make payment. It is therefore not necessary that a “tax invoice” – which has very specific requirements – needs to be issued. If consumers received only a “booking confirmation”, “acknowledgment of receipt” or similar document prior to 1 April 2018 that did not demand payment (such as tax invoice or pro-forma invoice), the time of supply was not triggered, and consumers will be subject to the 15% VAT rate once the goods or services are finally delivered after 1 April 2018.

Secondly, any deposit that was paid by the consumer, would have had to be applied as “consideration” for the supply of the goods or services to constitute “payment”. In this regard, consumers are largely dependent on how VAT vendors account for deposits in their financial systems. If deposits are accounted for separately (which is often the case with refundable deposits or where there are conditions attached to the supply) and only recognised as a supply when goods or services are received by the consumer, the deposit (although a transfer of money has occurred), would not constitute “payment”. For example, the time of supply may only be triggered once a guest has completed their stay at a guest house after 1 April 2018, resulting in VAT being levied at 15%.

The take away from the time of supply rules is therefore that payment of a deposit prior to 1 April 2018 does not necessarily result in a supply at 14% VAT and the rate to be applied is dependent on the specific facts of each case. Both consumers and VAT vendors should also take note that there are a number of rate specific rules that apply during the transition phase, and are encouraged to seek advice from a tax professional when they are in doubt about the rate to be applied.

[1] 89 of 1991 (the “VAT-Act”)

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Withdrawal of vat relief for residential property developers

Section 18B of the Value-Added Tax Act[1] was introduced effective 10 January 2012 in a bid to grant relief for residential property developers caused by the slump in the property market at that time. Many property developers, registered for VAT, would develop residential properties with a view to dispose of these properties in the short-term as trading stock and as part of its VAT enterprise. However, following the global financial crisis of little less than a decade ago, many property developers found themselves in a position where they were increasingly forced to rent out residential properties once a development was completed due to the slower rate at which properties could be disposed of compared to earlier.

The letting of residential property is typically exempt from VAT. Due to a change in use of the properties therefore (albeit temporarily) from being held for sale as trading stock to now being put up to be let in the interim while being on market constituted a change in use of the properties. Due to the change in use of the properties, from being used to make taxable VAT supplies in the ordinary course of business and being sold as trading stock by the developer, to now being used to make VAT exempt supplies in the form of being used to generate residential rental income, the provisions of section 18(1) of the VAT Act would ordinarily have applied. In terms of section 18(1), where goods have been acquired previously for purposes of making VATable supplies, and these goods are subsequently used to make exempt supplies, the VAT vendor must be deemed to have disposed of all those assets for VAT purposes. In other words, even though no actual disposal of assets has taken place, such a disposal is deemed to take place for VAT purposes and which gives rise to output VAT having to be accounted and paid for by the developer based on the open market value of the property at that stage.[2]

As one could quite easily imagine, having to account for output VAT in these circumstances may be prohibitive, especially considering that the value of a property will likely have been enhanced due to the development and that VAT inputs thus far claimed by the developer would be overshadowed by the output VAT amount that is now required to be claimed.

It is in acknowledgement hereof that section 18B was introduced to the VAT Act in 2012. In terms of that provision, property developers were granted a 36-month grace period within which to sell properties, and during which time these residential properties could be rented out without a deemed supply being triggered for VAT purposes.

When introduced originally, it was made clear at that stage that the relief for temporary letting as explained above will only be in effect until 1 January 2018. However, it is arguable that the property market has not recovered sufficiently yet for the relief to be withdrawn at this stage.

[1] 89 of 1991

[2] Section 10(7) of the VAT Act

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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