This article is based on tax law for the year ending 29 February 2025.
I need clarity on the VAT and tax implications of lease agreements and invoicing in South Africa.
In the UK, there is a concept of demand letters, where a demand letter is issued for monthly rentals, and an invoice is only generated once payment is received. This helps with cash flow, as VAT only becomes due upon invoicing. Do we have a similar concept in South Africa that could assist with cash flow management, considering that VAT becomes payable when an invoice is raised?
Additionally, if we have a lease agreement in place but issue invoices late, what are the tax and VAT implications?
The concern relates to the VAT and tax implications of lease agreements in South Africa, particularly whether demand letters can be used to improve cash flow by delaying VAT liability and the consequences of issuing invoices late under a lease agreement.
VAT Liability Timing and Demand Letters:
VAT and Demand Letters in South Africa
Unlike the UK's demand letter system, South African VAT legislation does not allow demand letters to delay VAT liability. Under Section 7(1)(a) of the VAT Act, VAT becomes payable at the earlier of:
As a result, issuing a demand letter without an invoice does not defer VAT liability. To manage cash flow effectively, it may be beneficial to structure payment terms so that invoicing and payment dates align.
Implications of Late Invoicing
Late invoicing under a lease agreement may have the following consequences:
For further details, consult SARS’s VAT 404 Guide for Vendors, which provides comprehensive information on VAT compliance.