The South African Minister of Finance (at the time), Malusi Gigaba introduced an amended Value-Added Tax (VAT) rate on 21 February 2018 in the annual Budget speech. The increase is lower than predicted from 14% to 15% with an effective date 1 April 2018.
From the effective date, 1 April 2018, vendors will have to ensure that they comply with the change in rate. Vendors should carefully consider the complexities that could arise in system set-ups and complex transactions.
There are some times when the VAT rate of 14% will still be applicable and when the new increased VAT rate of 15% will apply.
Normal time of supply
Although the new increased VAT rate will be effective from 1 April 2018, there will be circumstances after 1 April 2018 where the old VAT rate of 14% will still be applicable. Most instances, the normal time of supply rules will apply (earliest of the time of any payment received or invoice issued relating to the supply) but there could be instances where the old rate may still be applicable as listed below:
- Credit notes are issued after 1 April 2018 and it relates to a supply that was subject to the old rate of 14%;
- Settlements and volume discounts/rebates relating to supplies entered into before 1 April 2018 at 14%;
- Bad debts written off or recovered where the initial supply was subject to VAT at 14%;
There are a number of basic transitional rules that cater for the increase in the VAT rate. These rules provide guidance for the various permutations that may arise.
- Goods or services supplied before 1 April 2018 and where an invoice is only issued after the effective date:
- The transitional rules effectively override the normal time of supply rules.
- The time of supply rules provides that the VAT rate must be applied at the time the goods are provided or the service is rendered.
- Goods are deemed to be provided on the date it is delivered to the recipient and services are deemed to be provided on the date the service is initiated or when the recipient takes occupation of fixed property.
- It follows that the supplies will still be subject to VAT at 14% even if the invoice is issued after 1 April 2018.
- Goods or services supplied after 1 April 2018:
- In general, if the supplies are made after 1 April 2018, the said supplies should be levied at the VAT rate of 15%;
- However, if the time of supply was triggered on and after the day of the VAT rate increase announcement i.e. 21 February 2018 and 31 March 2018, and the goods were supplied before 23 April 2018, the VAT rate of 14% will be still be applicable
- If the goods are supplied after 23 April 2018, the VAT rate of 15% will be applicable.
- Services rendered on or after 1 April 2018 but the time of supply is deemed to take place before 1 April 2018 then the VAT rate of 15% will be applicable.
- The anti-avoidance rule will not apply where it is customary for the supplier to issue invoices or receive payments before the goods or services are provided (i.e. subscriptions to professional bodies).
- Supplies commencing before and finalised after 1 April 2018 such as (goods provided under rental agreement, services which are supplied periodically, goods supplied progressively and/ or goods supplied directly in construction, repair, improvement, assembly or alterations):
- If goods are provided to the recipient under an ordinary supply or rental agreement before 1 April 2018, the supply is subject to VAT at 14%.
- However, if goods or services are supplied on a progressive or periodic basis before and after 1 April 2018, an apportionment should be made on a “fair” and “reasonable” basis. There are no guidelines relating to the apportionment methodology.
- Supply of residential property:
- Where an agreement is entered into before 1 April 2018 (signed by both parties) and the price of the sale or construction of such property is determined in said agreement, VAT at 14% will be applicable where the registration of the property will only take place after 1 April 2018.
- No specific transitional rules in terms of commercial property;
- Lay-by sales
- Where a lay-by agreement is entered into and concluded before 1 April 2018 and a deposit has been received before 1 April 2018 then VAT at the rate of 14% will be payable in terms of such an agreement;
- If the lay-by agreement is concluded after 1 April 2018 then the VAT rate of 15% will be payable in terms of the said agreement.
- VAT on imported goods
- The VAT rate applicable will be the rate on the date on which the imported goods were cleared for consumption.
- VAT on imported services
- VAT rate will be the rate applicable on the earliest date on which an invoice was issued or the recipient made payment.
Recovery of increased VAT
The VAT Act allows a vendor to recover an amount equal to increase in the VAT rate from the recipient of the supply unless the contrary is expressly agreed to in any written agreement.
It is important to note that the consideration of a supply in terms of long term contract may not be adjusted as a result of the rate increase where a fee, charge or other amount is determined as a percentage of the total consideration (the VAT inclusive amount), except if the main supply is zero-rated or an exempt supply.
We highly recommend that vendors investigate all existing long terms agreements that extends over the effective date of the increase in the VAT rate.
Prices quoted or advertised
Vendors should include the increased VAT rate on any prices quoted or advertised from 1 April 2018. SARS however granted permission to vendors to display a notice that the price does not include VAT at the increased rate of 15% and prices will be adjusted at the point of payment. Vendor must prominently display this notice at all entrances to the business premises. This concession is only effective up the end of May 2018.
Vendors are only allowed to claim the input tax reflected on the actual tax invoice it received. Even in the instance where the supplier applied the incorrect VAT rate.
VAT return completion
SARS indicated that they would updated the VAT return to reflect the two VAT rates for tax periods after 1 April 2018. Vendors should therefore take cognisance of the change and ensure that they complete the VAT return correctly.
It is not possible to address all the various complexities or VAT implications of all transactions relating to the VAT rate increase as it may become highly technical and can become cumbersome. It is therefore important to consider these rules as the incorrect application of the applicable VAT rate may result in SARS levying penalties and interest.
We consequently recommend that Vendors also consider reading SARS’s two publications on the topic (below) or consult us where they are not confident of what VAT rate is applicable to their specific supplies.