[FAQ] The VAT implications of paying salaries on behalf of another connected company

[FAQ] The VAT implications of paying salaries on behalf of another connected company

• 29 May 2020
• VAT
• Christo Theron

Background

Company A paid salaries on behalf of Company B as a result of financial difficulties caused by the COVID-19 lockdown. Company A and Company B are connected in that they share the same director. Company A is a VAT vendor Company B is not a VAT vendor. Company A now wants to issue an invoice to Company B for the salaries paid.

Question

Is VAT payable on the invoice issued by Company A to Company B for the salaries paid? If so, how must this be reflected in Company B’s books?

The VAT Act

General principles

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.

“Services” is defined in section 1(1) of the VAT Act as anything done or to be done, including the granting, assignment, session or surrender of any right or the making available of any facility or advantage.

“Supply” is defined in section 1(1) of the VAT Act as performance in terms of a sale, rental agreement, instalment credit agreement and all other forms of supply, whether voluntary, compulsory or by operation of law. It also includes any derivative of the term supply.

Sections dealing with the value of a supply

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 less the amount of VAT included in the consideration.

“Consideration” is defined in section 1(1) of the VAT Act as “in relation to the supply of goods or services” 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.

Application of the principles

Based on the information supplied Company A merely paid the salaries on behalf of Company B, while the employees were never employed by Company A, neither did Company A make use of the services of the employees of Company B.

Based on the above analysis, the nature of the payment by Company A to Company B was that of providing bridging finance (i.e. a short-term loan) by Company A to Company B. The amount repaid would under these circumstances constitute a repayment of a loan, not consideration for a taxable supply of goods or services.

The invoice issued by Company A to Company B would accordingly constitute a commercial document indicating an obligation to refund an amount previously advanced. It would not constitute an invoice as defined in the VAT Act that would trigger a VAT liability. It is also doubtful whether an invoice is the appropriate document to issue for commercial purposes. A more appropriate document would probably be a loan statement.

In summary, based on the above understanding of the arrangement, the recovery by Company A from Company B would not be subject to VAT. The transactions should in both entities be treated as loan account entries.

Webinar Commentary

Further webinar commentary on VAT invoice requirements can also be accessed here.

0 COMMENTS

LEAVE A COMMENT