[FAQ] The tax implication of money received to prepare meals for donation

[FAQ] The tax implication of money received to prepare meals for donation

• 11 May 2021
• VAT
• The Tax Faculty Tax Specialist

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

Background

A VAT registered private company operates in the catering sector of the food industry. More specifically they sell meals in corporate offices. The company started an initiative whereby they prepare meals and distribute it to people in need. Their customers would select how many meals they would like to donate/sponsor and pay the funds to the company. The company would then prepare the meals and distribute it in communities that they identify as needing it the most. They don't want to make a profit on the funds received.

Please advise on the following:

1. Are the funds that the company receives from their customers for this initiative regarded as donations or would it be seen as normal sales?

2. If it is donations, should VAT be charged on the donations received?

3. In general, should VAT be levied on donations?

Answer

The VAT Act

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%), 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.

“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. It includes amounts paid by the recipient of the supply or by any other person. The definition specifically excludes any payment made by any person as a donation to any association not for gain.

Application of the principles

Donations in the VAT Act

Donations from a VAT perspective only applies to amounts donated to associations not for gain. It is common cause that the private company is not an association not for gain as defined in the VAT Act. The issue of whether the amounts received constitute donations in the present circumstances is accordingly moot.

The nature of consideration

The issue for consideration is whether the amounts received can be held to have been paid to the private company as amounts of “consideration” received for the supply of taxable goods or services.

The definition of “consideration” in section 1(1) of the VAT Act includes amounts paid by any party to a supplier of goods or services, i.e. the payments need not be made by the physical recipients of the goods or services. It further includes amounts paid voluntarily. With regards to the present circumstances it is common cause that the clients of the private company pay the relevant amounts voluntarily to the private company to supply food/food parcels to third parties.

The remaining issue for consideration is the closeness of the connection between the payments and the supply of the food/food parcels (i.e. whether it could be held that the payments are made “in respect of, in response to, or for the inducement of, the supply of any goods or services”). Based on the information supplied there appears to be a direct link between the payments made and the meals/food parcels supplied. As such, based on the information supplied, the amounts contributed by the clients of the private company would constitute consideration for the making of taxable supplies and would be subject to VAT.

Kindly note that if the full direct and indirect cost of supplying the meals/food parcels are not recovered by the private company from its clients (i.e. the private company subsidises the cost of supplying the meals/food parcels), the VAT implications will be different.

Webinar Commentary

Refer to webinar commentary on The Fairness for All with the Office of the Tax Ombud 2021.

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