[FAQ] Input tax on capital equipment acquired before registration

[FAQ] Input tax on capital equipment acquired before registration

• 04 June 2021
• VAT
• Christo Theron

This article is based on tax law for the year ending 28 February 2021.

Background

A company registered in 2015 and bought capital equipment. The equipment was fully written-off for income tax purposes in the 2018 year of assessment (50/30/20). In 2021 the company registered as a VAT vendor when it became liable to register as such (compulsory registration).

Please advise on the following:

• Can input tax be claimed on the capital equipment purchased in 2015 or any other time prior to registering as a VAT vendor?
• What documentation is required to support the claim?

Answer

The VAT Act

Section 16(3)(f) of the VAT Act allows a vendor a deduction of amounts calculated in accordance with, amongst others, section 8(4) of the VAT Act.

Section 18(4)(b)(i) of the VAT Act determines that where goods or services have been supplied to or imported by a person and VAT has been charged on the supply, and no deduction of input tax has been made, such goods are deemed to be supplied to the vendor in the tax period that the vendor first uses the goods or services in a taxable activity.

The formula to compute the quantum of the deduction in terms of section 18(4) of the VAT Act is: A x B x C x D, where “A” represents the tax fraction (currently 15/115), "B" represents the lesser of the adjusted cost of the goods or the open market value of the goods or services at the time when the supply is deemed to be made, “C” represents the percentage taxable use to which the goods or services will be put, and “D” represents the extent to which the purchase price of second-hand goods have been settled. “D” is the level of taxable use (which will be 100% in the current circumstances).

Section 16(2)(f) of the VAT Act determines that a VAT vendor may not make a deduction in terms of, amongst others, section 16(3)(f) of the VAT Act unless the vendor is in possession of documentary proof as prescribed by the Commissioner substantiating the vendor’s entitlement to the deduction at the time the return in respect of the deduction is furnished. The documentary proof required by the commissioner is contained in VAT Interpretation Note No. 92 (“the IN”).

VAT Interpretation Note 92

Item E under Paragraph 3 of the IN deals with the documentation that must be obtained and retained to make a deduction in terms of section 16(3)(f) of the VAT Act. It distinguishes between adjustments in respect of goods and services acquired more than 5 years prior to the effective date of registration and goods and services acquired during the 5-year period prior to the effective date of registration.

With regards to goods or services acquired during the 5-year period prior to the effective date of registration, the following documentation must be held:

(a) The original tax invoice; and

(b) Proof of the open market value of the goods or services on the effective date of registration.

With regards to goods or services acquired before the 5-year period prior to the effective date of registration, the following documentation must be held:

(a) Copy of the asset register (where relevant);

(b) Copy of the financial statements; and

(c) A calculation (using the formula provided in the VAT Act) reflecting the determination of the amount of the deduction. This includes how the VAT vendor arrived at the market value of the goods or services brought into the enterprise on the effective date of registration.

Application of the principles

The company would be entitled to a deduction in respect of goods and services acquired prior to the effective date of registration in terms of section 16(3)(f) of the VAT Act if such goods or services will be used in the VAT enterprise after the effective date of registration. Kindly note that the deduction is limited to VAT on the market value of the goods or services on the effective date of registration as a VAT vendor.

The value of the goods or services brought into the VAT enterprise must be supported by objective evidence (for example a formal valuation). Where goods or services have been acquired a substantial period before the effective date of registration, obtaining the relevant support for the claim in practice is often challenging. If the claim is successful, the amount recovered will constitute a recoupment of capital allowances previously claimed (section 8(4)(a) of the Income Tax Act) and will be taxable in the hands of the Company.

Webinar Commentary

Refer to the following webinar: Considering a 360 on Property, Plant and Equipment – 2021 here.

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