The increase in the VAT rate from 14% to 15% was arguably the biggest announcement in the 2018 Budget Review from a tax perspective. This change in VAT rate will impact consumers directly as the cost of goods or services increase from 1 April 2018. However, VAT vendors may also face some transitional challenges as a result of the change in the rate. These include determining the appropriate rate of tax on supplies made around 1 April 2018 and claiming input tax at the correct rate.
The National Treasury announced as part of the Budget Review 2018 that with effect from 1 April 2018 the VAT rate in South Africa will be increased from 14% to 15%. This announcement was welcomed by some as an increase in the VAT rate was seen as one of the ways in which the budget shortfall could be funded in the least damaging way to the economy. However, it appears as if there is also some pressure mounting on government due to the regressive nature of the tax and the impact of the increase on the cost of living to be experienced by all South Africa, including the poor.
This newsletter aims to provide a brief overview of some of the challenges that may be encountered by VAT vendors as a result of the change in rate.
Supplies made by vendors
The rate at which a VAT vendor, and in most cases the accounting system of the vendor, should levy VAT will primarily depend on the whether the time of the supply made was before or on/after 1 April 2018. VAT should be levied at 14% on the former and 15% on the latter. It may however not be as simple as this. The VAT Act contains a number of transitional rules that need to be taken into account:
- Supplies where goods are delivered or services fully rendered before 1 April 2018 but the triggers for the time of supply (normally the i ssuing of an i nvoice or payment of consideration) only occur on or after 1 April 2018 would in most instances attract VAT at 14%. Apportionment of transactions may be required where the supply spans over a period starting before but ending after 1 April 2018.
- Transactions in terms of which an invoice is issued or payment is made before 1 April 2018 to still benefit from the lower rate of 14%, but the goods are only delivered or services are only rendered on or after 1 April 2018 could be subject to VAT at 15%. There are a number of detailed rules in this regard to consider in determining which rate should apply.
- Specific transitional rules apply to transactions involving fixed property, lay-by sales and certain supplies made with regular payment or invoicing arrangements.
Input tax deductions
In principle, a vendor is entitled to deduct input tax equal to the tax charged to that vendor on goods or services acquired for purposes of its enterprise that makes taxable supplies. The transitional rules do not change this principle: the rate at which a vendor claims input tax will therefore depend on the rate at which its suppliers levied VAT on the supplies.
Invoices issued at the incorrect rate and subsequently corrected by suppliers may pose a challenge to vendors who claimed input tax in respect of such invoices.
Prior to the announcement of the VAT rate increase, the possibility of a change in the VAT rate was often not contemplated when agreements were drafted. As a result, many agreements make provision for VAT at 14% without any mention as to what would happen if the rate changes. The VAT Act provides a mechanism to vendors to recover the increase in the tax rate from their customers without having to amend agreements. An exception however exists where an agreement specifically states that the supplier cannot recover the effect of an increase in tax rate, in which case the supplier would bear the cost of the increased rate. (March 2018)
Pieter van der Zwan, the author of this article,
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.