This article is based on tax law for the year ending 28 February 2021.
Two companies are connected persons for VAT purposes. One company operates a guesthouse and the other operates in the construction industry.
The construction company had a sub-contractor staying at the guest house for 30 days. The construction company is liable for the payment of the accommodation. According to the VAT Act the guesthouse charges VAT on 60% of the full amount (which equates to 9% VAT on the full invoice amount).
What percentage VAT can the construction company claim? If 15%, the VAT on the supplier invoice captured is going to differ from the invoice amount issued by the supplier (guesthouse).
Sections dealing with output tax
Section 7(1)(a) of the VAT Act imposes VAT on the supply of goods or services made by a vendor in the course or furtherance of the VAT enterprise carried on by the vendor. VAT is imposed at the standard rate of (currently 15%) on the value of a supply, unless the supply qualifies to be supplied at the zero-rate in terms of section 11 of the VAT Act or is exempt from VAT in terms of section 12 of the VAT Act.
Section 10(2) of the VAT Act determines that the value to be placed on a supply of goods or services is the amount of the consideration levied for the supply.
“Consideration” is defined in section 1(1) of the VAT Act as any payment made or to be made, whether in money or otherwise, or any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of any goods or services.
Section 10(10) of the VAT Act determines that where domestic goods and services are supplied at an all-inclusive charge in any enterprise supplying commercial accommodation for an unbroken period exceeding 28 days, the consideration in money is deemed to be 60% of the all-inclusive charge.
Sections dealing with input tax
Section 16(3)(a)(i) of the VAT Act allows a vendor a deduction of the amounts of input tax against output tax attributable to a tax period, being input tax in respect of supplies of goods and services made to the vendor during a tax period.
“Input tax” is defined in section 1(1) of the VAT Act as, amongst others, VAT paid on goods or services supplied to a vendor, to the extent that the vendor has acquired the goods or services for the purpose of consumption, use or supply in the course of making taxable supplies.
Kindly note that we are not expressing a view on whether the construction company is entitled to claim input tax with regards to the charges raised by the guest house (being entertainment as defined in section 1(1) of the VAT Act). We assume that for the purposes of what follows, the construction company is entitled to a deduction.
Section 10(10) of the VAT Act does not change the rate of VAT to 9%. It changes the value of the supply on which the VAT rate of 15% must be applied. VAT is accordingly payable at the standard rate of 15% on the value of the supply determined in accordance with section 10(10) of the VAT Act.
If the construction company were entitled to a deduction in respect of the goods and services supplied by the guest house, the amount of the deduction would be the actual amount of VAT charged by the guest house on its tax invoices.
For monthly tax updates the Monthly Tax Update Feb 2021 - Budget Highlights can be accessed here.