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[FAQ] VAT registration and output tax after a tender is awarded
- 20 July 2021
- VAT
- The Tax Faculty Tax Specialist
This article is based on tax law for the year ending 28 February 2022.
Background
A taxpayer was awarded a tender for the supply, delivery and installation of water reticulation to various farms located across North West Province for the Stimulus Project of Department of Rural Development & Land Reform. The tender was approved last year in June 2020 at R2.9 million. The taxpayer only registered for VAT in March 2021. At the time of registration, 70% of the work was completed.
How must the taxpayer account for the 30% remaining work in terms of VAT? If the taxpayer charges VAT, it will increase the value of the tender.
Answer
The VAT Act
Section 67(1) of the VAT Act determines that whenever VAT is imposed for the first time (as in the case of a first-time registration) in terms of the VAT Act in respect of any supply of goods or services and in respect of which an agreement was entered into by the acceptance of an offer made before VAT was imposed for the first time in terms of the VAT Act, the vendor may recover from the recipient as an addition to the amounts payable by the recipient to the vendor a sum equal to any amount payable by the vendor by way of the VAT payable on the supply. This rule does not apply where the supply agreement (the contract) specifically states that the sales price may not be increased in the case of VAT being imposed for the first time or an increase in the VAT rate.
Section 67(1) of the VAT Act further determines that if the supplier does not recover the additional amount from the recipient, the supplier will be held liable for the VAT not recovered.
Section 64 of the VAT Act determines that a price is for VAT purposes deemed to include the VAT chargeable under section 7(1)(a) of the VAT Act. SARS may therefore recover the VAT included in the price from the vendor who made the supply, whether or not VAT was actually charged.
Application of the principles
The client will be entitled to recover the additional amount of VAT over and above the original contract price unless the agreement specifically states that in the case of VAT becoming payable it would be for the account of the client. Regard should therefore be had to the contract to determine whether the additional VAT can be recovered.
If the additional amount of VAT cannot be recovered as a result of a contractual exclusion, the amount actually charged for the services will be treated as VAT inclusive. In the case of public tenders, it is often challenging to recover the additional amount of VAT notwithstanding the fact that the VAT law may be on the side of the supplier.
Webinar Commentary
Refer to the following webinar: VAT Series: Concept of a VAT Enterprise and its Impact on the Management of VAT in Organisations - 2021 (Session 1) here.