Clarification on VAT and Tax Implications of Lease Agreements and Invoicing

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Clarification on VAT and Tax Implications of Lease Agreements and Invoicing

• 31 January 2025
• Accounting & Financial Reporting
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 29 February 2025.

Question:

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?

Answer:

1. The Problem / Facts

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.

2. Applicable Law

VAT Liability Timing and Demand Letters:

• Section 7(1)(a) of the VAT Act 89 of 1991

3. Application of the Law to the Facts

• 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:

• The issuance of an invoice, or
• The receipt of payment.

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:

• VAT remains payable at the earlier of invoicing or payment. Delaying an invoice will not defer VAT liability if payment has already been received.
• SARS may consider late invoicing as non-compliance, potentially leading to penalties or interest under Section 213 of the Tax Administration Act. To avoid this, invoices should be issued promptly when a taxable supply occurs or when payment is received.

For further details, consult SARS’s VAT 404 Guide for Vendors, which provides comprehensive information on VAT compliance.

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