The South African Minister of Finance, Malusi Gigaba, tabled the 2018/19 Budget in Parliament on Wednesday, 21 February 2018. Government announced a lower than predicted 1% increase in the value-added tax ("VAT") rate from the current 14% to 15% with effect from 1 April 2018.

Leaving aside the raging debates over whether the increase was a good move, the impact on the poor and whether zero rating of additional items should be introduced to assist in poverty relief, the reality is that businesses now have just over a month to "V" day!

Given the extensive systems and documentation changes required, this is an extremely short time frame in which to ensure compliance by 1 April. As a transaction-based tax, the tentacles of VAT reach into virtually every area and system in a business. Obviously, the core accounts receivable and payable systems and the general ledger are key. However, the rate change will affect sub-systems, payroll, invoicing, pricing, bad debts and many other operating procedures.

Financial institutions, residential property developers, certain educational institutions and any other exempt or partially exempt businesses will experience an increase in their base cost as they are unable to claim the full amount of VAT incurred on costs. Annual apportionment calculations will also be more complex, particularly for those businesses that do not have a March year end.

Businesses selling directly to the end consumer will face price pressures to remain competitive, and it will therefore be interesting to see how many retailers and other suppliers will try to absorb part of the additional VAT cost to the benefit of their customers.

When is the new rate applicable?

This might seem like a silly question; the new rate of 15% applies from 1 April, of course! However, tax is never that simple. Even after 1 April, there are circumstances where the applicable VAT rate will still be 14%, resulting in additional complexities and the necessity for systems that can deal with both rates for some time. Examples include:

  • credit notes issued after 1 April 2018 for supplies made at 14%
  • settlement and volume discounts
  • bad debts written off and recovered

To complicate matters further, section 67A of the Value-Added Tax Act, 1991 (the "VAT Act") contains complex rules governing the transitional period from the Budget announcement to 31 March 2018 which are dealt with below. Apart from clarifying which rate is applicable to specific supplies going forward from the Budget announcement, the transitional rules address the temptation to raise invoices now (at 14%) for supplies that will take place after 1 April, in order to avoid charging VAT at the higher rate.

Which VAT rate to apply in the transitional period

Goods are deemed to be provided by the supplier when:

(i) the goods are delivered to the recipient (arguably including physical and constructive delivery);
(ii) goods supplied under a rental agreement, when the recipient takes possession or occupation thereof; and
(iii) goods consisting of fixed property supplied by way of a sale, when the transfer thereof is effected by registration in a deeds registry.

Services are arguably deemed to be performed when they are actually or physically carried out or performed (ie, rendered).

In most instances, the normal time of supply rules in section 9 of the VAT Act apply to determine the time of supply for VAT accounting purposes; the general rule being that the supply takes place at the earlier of the issue of an invoice or the receipt of payment. Notwithstanding the general rule, there are specific rules applicable to fixed property transactions, rental and financial leases, construction contracts, inter-company supplies, among others.

However, the transitional rules set out below override the normal rules.

Transitional rules VAT rate to apply
Supplies before 1 April 2018

Goods (excluding fixed property by way of sale) are provided or services are performed during a period ending before 1 April 2018.

VAT is payable at the rate of 14%.

Supplies commencing before and ending on or after 1 April 2018

Goods (excluding fixed property by way of sale) are provided or services are performed during a period commencing before 1 April 2018 and ending on or after 1 April 2018.

Applicable to the following supplies:

  • goods that are provided under a rental agreement (ie, operating lease);
  • services that are performed under an agreement or law that provides for periodic payments;
  • goods supplied progressively or periodically under an agreement or law that provides for the consideration to be paid in instalments or periodically; and
  • goods or services supplied directly in the construction, repair, improvement, erection, manufacture, assembly or alteration of goods under any agreement or law that provides for the consideration to be paid in instalments or periodically in relation to the progressive nature of the work.
  • Part 1 (period before 1 April 2018): 14%
  • Part 2 (period on or after 1 April 2018): 15%

The allocation of the value (ie, VAT exclusive purchase price) to each part must be determined on a fair and reasonable basis.

There are no guidelines regarding the basis of apportionment to be used. The onus is on the vendor to prove that the apportionment applied is fair and reasonable in the circumstances.

Supplies after 1 April 2018

Goods or services supplied on or after 1 April 2018 in terms of the time of supply rules contained in section 9 of the VAT Act.

Anti-avoidance rule – overrides time of supply

If the time of supply for VAT purposes is triggered during the period from 21 February 2018 to 31 March 2018 and –

  • the goods are provided to the recipient on or after 22 April 2018, or
  • the services are performed on or after 1 April 2018, the time of supply is deemed to take place on 1 April 2018.

Such supplies must be accounted for in the vendor's April 2018 VAT return.

Anti-avoidance rule – not applicable

  • If it is the vendor's normal business practice to issue invoices (including at regular intervals) or receive payments before goods are provided or services are performed; or
  • The supply relates to the sale of residential property under a written agreement (discussed below).
VAT is payable at the rate of 15%.

Sale of residential property

A written agreement (which states the price of the sale or construction) is concluded and signed by the parties thereto before 1 April 2018 and the transfer registration in the deeds office or any payment of the purchase price will only take place on or after 1 April 2018.

Applicable to the following supplies

  • the sale of fixed property consisting of any dwelling together with land on which it is erected;
  • any real right conferring a right of occupation of a dwelling;
  • any sectional title unit which comprises a dwelling;
  • any share in a share block company that confers a right to or an interest in the use of a dwelling;
  • the sale of fixed property consisting of land or any real right conferring a right of occupation of land, for the sole or principal purpose of the erection by or for the purchaser 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.
VAT is payable at the rate of 14%.

Notably no transitional rules exist specifically in relation to commercial property. The VAT rate of such transactions will therefore be determined by the normal time of supply rules.

Lay-by agreements

Goods are sold in terms of, or services are supplied in relation to, a lay-by agreement which is concluded before 1 April 2018, provided a deposit is paid before 1 April 2018.

VAT is payable at the rate of 14%.

As can be seen, in addition to the enormous amount of work to be done on systems and procedures before 1 April, consideration must be given to the applicable VAT rate for every agreement or contract entered into from 22 February.

It is also recommended that all existing contracts that provide for ongoing or periodic supplies of goods and/or services be reviewed for the implications of the VAT rate change.

Corporate restructuring negotiations and transactions may be particularly vulnerable to the rate change where they have already been signed but delivery will only take place after 1 April 2018, due to various reasons, including obtaining relevant licences and approvals.

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.