How does the 1% VAT increase affect your business?
16 Mar 2018
The Minister of Finance announced the VAT rate increase from 14% to 15% in his Budget Speech on 21 February 2018. Whilst most business have been focusing on how to get their systems updated to account for the new rate, not many have taken into consideration the full impact of this rate change.
Sections 67 and 67A of the VAT Act, specifically deal with time of supply rules and the applicable VAT rate when there is a change in the VAT rate. As it has been approximately 25 years since we have had a change to the VAT rate in South Africa these rules do require some detailed analysis to ensure vendors properly account for VAT at the correct rate in the appropriate VAT period in order to avoid any unnecessary penalties and interest.
The general time of supply rules, in terms of section 9, provide for VAT to be imposed at the earlier of:
- The issuance of an invoice; or
- The date of payment
However the abovementioned transitional rules are summarised as follows:
- The time of supply is triggered by the supply of goods or services rather than the issuance of an invoice or receipt of payment.
- If goods are supplied or services rendered prior to 1 April 2018 the rate of 14% will apply regardless of when the invoice is issued or payment received.
- If services are provided before and after 1 April 2018 a fair and reasonable apportionment of the service fee must be done and the portion relating to the period prior to 1 April 2018 must be charged at 14% whereas the portion for the period after 1 April 2018 must be charged at 15%.
- In the event that a vendor issues an invoice or receives payment prior to 1 April 2018 but the goods are delivered or services rendered after 1 April 2018, the rate of 14% can be applied if such goods are services are supplied prior to 22 April 2018 (i.e. within 21 days). Failure to supply such goods or services within this 21 day period will result in the supply being deemed to occur on 1 April 2018 and subject to the higher rate of 15%.
- The supply of goods also include deemed supplies such as, in the case of rental agreements where the goods are deemed to be supplied when the recipient takes possession or occupation of the property.
- Similarly in the case of fixed property there is a deemed supply when the property is registered in the Deeds office and payment received.
- If a sale agreement is entered into prior to 1 April 2018 but the property only registered and payment made after 1 April 2018 the new rate of 15% will apply.
- However certain exceptions to this rule apply in respect of residential property where the old rate of 14% can apply if the agreement was concluded prior to 1 April 2018.
- Where contracts have been entered into prior to 1 April 2018 and do not specifically prohibit the vendor from recovering any increase in the VAT amount from the recipient of the goods or services, that vendor is entitled to recover the additional VAT from the recipient. If the vendor is unable to recover the additional VAT, the vendor will be liable for the increased VAT amount.
- Where goods are imported, the time of supply is triggered when the goods are cleared for home consumption therefore even if the goods arrived in South Africa prior to 1 April 2018 but only cleared subsequent to this date, the rate of 15% will apply.
- Where a debit or credit note issued, the rate of 14% must apply where that debit or credit note relates to the supply of goods or services prior to 1 April 2018.
It is of utmost importance that these rules are adhered to as failure to account for VAT in the correct period and at the correct rate will result in penalties and interest. Furthermore it is likely that the number of audits for the transitional period, being February to April 2018, will increase as a result of SARS ensuring that these transitional provisions have been complied with by vendors.
SARS will shortly issue a notice on the disclosure requirements in the VAT return for March/April and subsequent returns when VAT output is levied at a mixture of 14% and 15%.