What is relevant in a record of review?

In a judgment delivered on 17 February 2020, the Gauteng High Court dealt with a matter regarding a “record of review”, and its relevance relating to a review application brought by the Applicant in the matter, Medtronic International (“Medtronic”), on the refusal by the South African Revenue Service’s (“SARS”) refusal to reduce certain interests and penalties imposed on its Value-Added Tax (“VAT”) statement of account.

Medtronic was the victim of large-scale fraud to the value of approximately R460 million and as a result, fell behind with its tax obligations (the payment of VAT in particular). To correct the situation, it approached SARS through a Voluntary Disclosure Programme (“VDP”) application and entered into an agreement with SARS. Generally, the VDP programme does not allow for the reduction in interest due to non-payment of taxes. Medtronic, therefore, applied for the remission of interest in terms of section 39 of the Value-Added Tax Act, No 89 of 1991 (“the VAT Act”). SARS refused this application on the basis that the VDP agreement entered into between the parties was already in effect and, presumably, did not deal with interest.

Medtronic proceeded with review proceedings to overturn that decision, based on various points of law (including the principle of legality). Consequent to the launching of the review application, SARS delivered the record of proceedings (as it is required to do) to enable Medtronic to formulate its review arguments. After considering the record, Medtronic concluded that it does not comply with the requirements of a “record of review”. This was based upon the fact that various documents, such as the main application, internal memoranda, directives, policy documents, records of deliberations, and minutes of meetings, on which SARS based its decision, were not included. SARS claimed legal professional privilege on various documents relating to advice from legal advisors and claimed it was confidential information. Medtronic proceeded with a further legal notice, requiring SARS to dispatch the necessary documents. SARS failed to respond to this notice, as it contended it has complied with the necessary rules and that there was no further need for compliance.

The question arising from this dispute is: What is relevant in the “record of review”?

The court held that where a party requires evidence as to the interpretation of statutory provisions for those responsible for administering the provision, the courts may invoke the so-called Bosch-principle to tip the scales in the favour of those responsible for the administration of the legislation. The principle entails that evidence of a prior and consistent interpretation of a statutory provision by those responsible for the administration of legislation is admissible. In this instance, SARS had decided not to invoke this principle. The court considered the additional records requested by Medtronic and it sided with SARS in that the Bosch-principle was not applicable. Furthermore, the documentation sought would not further the interpretation of the statutory provision on which Medtronic intends to rely in a manner opposed to that which SARS has done. The court considered the documents that SARS had not provided as part of the “record of review” to be irrelevant. Ultimately, the court’s premise was that relevance is not dependent upon the pleaded issues in the initial review application. Relevance remains to be determined by the decision sought to be reviewed.

The take-away from the judgment is that an applicant will not always have full access to all SARS’s internal records as part of a review application. It is, therefore, important to ensure that when review proceedings are lodged, applicants appreciate what constitutes a proper “record of review”.

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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

A single supply of services: Which VAT rate applies?

On 3 April 2020, the Supreme Court of Appeal delivered a judgement against Diageo South Africa (Pty) Ltd (“Diageo SA”) in a value-added tax (“VAT”) matter relating to the supply of advertising and promotion (“A&P”) services to various non-South African brand owners in the group.

Diageo SA entered into an agreement with the foreign brand owners for the A&P of their products in South Africa. The brand owners invested in A&P to build and maintain brand recognition and generate sales by way of enhanced brand equity. The brand owners relied on Diageo SA to build their brands locally through A&P services in return for a fee. The A&P activities consisted of a range of activities, such as advertising across various channels, brand building promotions, events, sponsorships, and market research. Services that were rendered by Diageo SA included advertising media, website design, website building, social networking, and sponsorship of, amongst others, sports events.

To render the A&P services, Diageo SA made use of promotional merchandise and packaging, sample products, and branded giveaway items. These were given away free of charge to third parties for use or consumption within South Africa for the purpose of promoting the products. Two categories of goods were used. Firstly, the products of the brand owners (stock that has been taken out of the trading stock and used for product sampling or tasting); secondly, point-of-sale items were given to third parties and employees, for no consideration.

The fee charged by Diageo SA to the brand owners represented the cost incurred by Diageo SA in rendering the A&P services, which comprised the supply of both goods and services, to the brand owners. However, the tax invoices rendered by Diageo SA to the brand owners reflected a single total fee for services rendered. It did not differentiate between goods and services.

Why is this an issue? While the services to the brand owners are an exported service that can be zero-rated, the goods were consumed locally in South Africa and should have been standard rated (the principle of VAT being a tax imposed where the product is consumed). Part of the single fee charged to the brand owners should, therefore, carry VAT at the standard rate of 15%, and only a part thereof can be zero-rated.

Diageo SA took the view that the fee was charged on the basis that it constituted a zero-rated supply of the A&P services, since “exported services” in South Africa constitute zero-rated supplies. According to Diageo SA, there was only a single supply of A&P, not a separate supply of services and a separate supply of goods.

The court found that the single supply provided by Diageo SA to the brand owners consisted of both goods and services that were distinct and clearly identifiable from each other. There is no artificial and insensible result or commercially unreal outcome if that view is followed. The fee should, therefore, have been split between a zero-rated service, and goods at the standard rate.

The purpose of Section 8(15) of the VAT Act (in terms of which the decision was made) is to ensure that, in a case like this, Diageo and “other similarly positioned VAT vendors fulfil their obligation to pay VAT at the standard rate on the goods that they have supplied.”

Diageo’s appeal was dismissed and the assessments issued were maintained.

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)

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)

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)

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)

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)

Changes to the dispute management process

The South African Revenue Service (SARS) recently introduced certain changes and improvements to its current dispute management process.

Any taxpayer who is aggrieved by any assessment may request SARS to provide those reasons for the assessment sufficient to enable the taxpayer to formulate an objection. For the first time, taxpayers will be able to make such a request for reasons for an assessment electronically via eFiling or at any SARS branch. This automated functionality will be available for personal income tax (PIT), corporate income tax (CIT) and value-added tax (VAT). Where a valid request for reasons has been identified by the SARS system, the period that an objection can be lodged will be automatically extended to the period permitted by the Dispute Resolution Rules issued by SARS in terms of section 103 of the Tax Administration Act.[1]

The new dispute management process will also introduce a separate condonation workflow whereby the taxpayer will be allowed to submit a Request for Reasons, Notice of Objection (NOO) or Notice of Appeal (NOA) after the periods prescribed by the Dispute Resolution Rules have lapsed. Previously, the condonation process was included in the actual dispute process. To the extent therefore that a dispute was treated by SARS as invalid (as opposed to not being allowed to proceed as a result of a late submission), taxpayers were confused as to the outcome of the dispute and what the next available step in the dispute process was. The new automated condonation process therefore allows SARS to attend to requests for condonation for the late submission of the relevant notices or requests before attending to the dispute itself. This will ensure that the late submission is aligned with the legislation as it will prevent situations where the dispute is simply classified as invalid merely because the relevant submission is late (quite often automatically).

Taxpayers will also now be able to request SARS to suspend certain payments of VAT pending the outcome of a VAT dispute via eFiling or at a SARS branch similar to the requests for suspension of payments that were already implemented for PIT and CIT in 2015.

eFiling will furthermore be made an entirely guided process to ensure that the dispute is submitted according to legislative requirements and to eliminate any invalid disputes from being submitted to SARS.

The take-away is that SARS regards these changes as part of its ongoing commitment to delivering a better service to taxpayers. The changes to the dispute management process are therefore aimed at aligning the process more closely with the relevant legislation, to remove uncertainties that existed with regards to the dispute process and to make the process easier to follow.

[1]28 of 2011

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)

VAT and common law theft

A recent decision has created some interest in whether the taxpayers failing to pay over the correct amounts of VAT can be charged – in addition to other statutory crimes prescribed by the VAT Act, 89 of 1991 – with the common law crime of theft.

In Director of Public Prosecutions, Western Cape v Parker[1] the Director of Public Prosecutions (“DPP”) appealed a decision by the Western Cape High Court that Parker, in his capacity as sole representative of a close corporation, had not committed common law theft in relation to the misappropriation of VAT due and payable by the close corporation to SARS. (Parker had been convicted of common law theft earlier in the Bellville Regional Court and sentenced to five years’ imprisonment, which conviction he appealed to the High Court.)

The Supreme Court of Appeal dismissed the appeal by the DPP as related to the charge of common law theft levied against Parker as related to the misappropriation of VAT amounts, due and payable to SARS. Essentially to succeed, the DPP had to show that the monies not paid over to SARS were in law monies received and held effectively by VAT vendors as agents or in trust on behalf of SARS, i.e. that SARS had established ownership over such funds even before it having being paid over. The court directed that no relationship could be established whereby VAT amounts due were received and held by VAT vendors prior to payment thereof over to SARS. In other words, the DPP could not show that Parker had misappropriated property which belonged to another – an essential element of common law theft that had to be present to secure a conviction.

VAT remains a tax in the proper sense of the word: monies received from customers were that of the taxpayer. Only once monies were paid over to SARS did it become SARS’ property. Even when the VAT in question became payable, such obligation did not per se create a right of ownership over the funds for SARS. Admittedly SARS has a legal claim against the taxpayer for an amount of tax, but it cannot be said to have established right of ownership over any specific funds held by the taxpayer.

It should be noted that Parker only appealed his conviction of common law theft. He was also convicted in the Regional Court of those crimes provided for in the VAT Act (section 28(1)(b) read with section 58(d)) which he did not appeal. His sentence in this regard was maintained, being either a fine of R10,000 of two years’ imprisonment, suspended for four years.

[1] [2015] 1 All SA 525 (SCA)

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)

Non-executive Directors’ remuneration: VAT and PAYE

Two significant rulings by SARS, both relating to non-executive directors’ remuneration, were published by SARS during February 2017. The rulings, Binding General Rulings 40 and 41, concerned the VAT and PAYE treatment respectively to be afforded to remuneration paid to non-executive directors. The significance of rulings generally is that it creates a binding effect upon SARS to interpret and apply tax laws in accordance therewith. It therefore goes a long way in creating certainty for the public in how to approach certain matters and to be sure that their treatment accords with the SARS interpretation of the law too – in this case as relates the tax treatment of non-executive directors’ remuneration.

The rulings both start from the premise that the term “non-executive director” is not defined in the Income Tax or VAT Acts. However, the rulings borrow from the King III Report in determining that the role of a non-executive director would typically include:

  • providing objective judgment, independent of management of a company;
  • must not be involved in the management of the company; and
  • is independent of management on issues such as, amongst others, strategy, performance, resources, diversity, etc.

There is therefore a clear distinction from the active, more operations driven role that an executive director would take on.

As a result of the independent nature of their roles, non-executive directors are in terms of the rulings not considered to be “employees” for PAYE purposes. Therefore, amounts paid to them as remuneration will no longer be subject to PAYE being required to be withheld by the companies paying for these directors’ services. Moreover, the limitation on deductions of expenditure for income tax purposes that apply to “ordinary” employees will not apply to amounts received in consideration of services rendered by non-executive directors. The motivation for this determination is that non-executive directors are not employees in the sense that they are subject to the supervision and control of the company whom they serve, and the services are not required to be rendered at the premises of the company. Non-executive directors therefore carry on their roles as such independently of the companies by whom they are so engaged.

From a VAT perspective, and on the same basis as the above, such an independent trade conducted would however require non-executive directors to register for VAT going forward though, since they are conducting an enterprise separately and independently of the company paying for that services, and which services will therefore not amount to “employment”. The position is unlikely to affect the net financial effect of either the company paying for the services of the non-executive director or the director itself though: the director will increase its fees by 14% to account for the VAT effect, whereas the company (likely already VAT registered) will be able to claim the increase back as an input tax credit from SARS. From a compliance perspective though this is extremely burdensome, especially in the context where SARS is already extremely reluctant to register taxpayers for VAT.

Both rulings are applicable with effect from 1 June 2017. From a VAT perspective especially this is to be noted as VAT registrations would need to have been applied for and approved with effect from 1 June 2017 already. The VAT application process will have to be initiated therefore by implicated individuals as a matter of urgency, as this can take several weeks to complete.

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)

Non executive directors liable for VAT

-JOHANNESBURG

A ruling by the South African Revenue Service (SARS) that non-executive directors are required to register and charge VAT where they earn director’s fees exceeding the compulsory VAT registration threshold of R1 million during a 12-month period will likely create a significant administrative burden for non-executive directors and the companies they serve.

The ruling also raises questions about whether SARS will be able to cope with the large number of VAT registration applications that are likely to be submitted over the next three months before the ruling becomes effective.

Moreover, many listed companies – often holding companies earning mainly dividend income – are not registered for VAT and will not be able to claim a VAT deduction even though their non-executive directors will charge 14% VAT.

After a prolonged period of uncertainty about whether amounts payable to a non-executive director are subject to the deduction of employees tax, SARS issued two Binding General Rulings on the issue on Friday.

Parmi Natesan, executive at the Centre for Corporate Governance at the Institute of Directors in Southern Africa (IoDSA), says there has been much confusion and debate around  the issue in the past, with the IoDSA and other bodies having written to both SARS and National Treasury requesting clarity on the varying interpretation of both the Income Tax Act and the Value-Added Tax Act.

The IoDSA welcomes the fact that clarity has been provided, she says.

Gerhard Badenhorst, tax executive at ENSafrica, says SARS has previously ruled that director’s remuneration is not subject to VAT and although the rulings did not specifically refer to non-executive directors, the scenario described in the ruling was typically that of a non-executive director.

The rulings were withdrawn in 2009, but it was generally accepted that Sars still subsequently applied the principles set out in these rulings.

Badenhorst says in his experience, most companies considered non-executive directors to be employees.

“In most instances, companies purely deducted employees tax and they weren’t registered for VAT.”

The SARS ruling now explicitly states that director’s fees received by a non-executive director for services rendered on a company’s board are not subject to the deduction of employees’ tax.

“I think the administrative burden will be substantial for all parties involved and only time will tell whether the additional revenue collected by Sars will be substantial.”

Badenhorst says a further practical issue or question that has arisen is with regard to the VAT registration process.

“It is currently a difficult process to register for VAT purposes as SARS often rejects VAT registration applications  for various reasons, which causes the applicant to submit his or her application a number of times before the application is eventually accepted. The issue is whether SARS will be able to cope with the large number of VAT registration applications that are expected to be submitted over the next three months.”

While the ruling applies from June 1 2017, industry commentators differ on whether non-executive directors could face a VAT liability, penalties and interest related to prior tax periods.

Badenhorst says generally Sars would issue a binding general ruling in draft form, allowing industry to comment before a final ruling is issued, but in this case the ruling was issued in final form, and this issue would have to be clarified.

Since the ruling applies from June 1 2017 it seems that Sars may not seek to apply it retrospectively.

But Chris Eagar, attorney and director at Finvision VAT Specialists, says the ruling is not legislation and merely a confirmation of SARS’s interpretation. Therefore it doesn’t change the law.

If SARS agrees that the situation was unclear in the past, it may decide not to actively pursue the  application of the law retrospectively. However, its role is to apply the legislation as it stands. In such instance, there would be a historic liability going back five years, he says.

Non-executive directors and their employers would typically be on friendly terms and companies could decide to pay the VAT to the director retrospectively, with the employer claiming an input tax credit (if it is entitled to do so). In this way the director will not be out of pocket as far as the tax is concerned, upon payment to SARS.

But penalties and interest may still need to be paid, Eagar argues.

Under the Tax Administration Act, penalties range from 10% to 150%, but it is unlikely that SARS would impose these penalties, as the default seems to have arisen due to “bona fide inadvertent error”. The 10% late payment penalty will remain, however. Where the default constitutes a so-called “first incidence”, it is likely that SARS would waive this penalty upon application. This still leaves the potential VAT liability over the five-year period as well as the interest payable, he says.

SARS did not respond to a request for clarity on whether the ruling would be applied retrospectively by the time of publication.

Source: MoneyWeb Today

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)