12 Feb

Is a voucher still the perfect gift?

On 12 January 2021, the Gauteng High Court delivered judgement in the matter of MTN (Pty) Ltd v CSARS (79960/2019) [2021], in respect of a declaratory order that MTN sought to confirm their interpretation of the VAT treatment of certain airtime vouchers. The VAT Act distinguishes between two types of vouchers – those that can be used for unknown goods and services at the time of issue (consider, for example, a retail shopping voucher); and those vouchers that can be spent on specific goods and services (in other words, not able to be used for goods and services other than those specified).

Although the VAT consequences of the issue of the vouchers ultimately are the same, the matter becomes relevant for the time at which output tax should be paid in respect of the transaction. Section 10(18) of the VAT Act deals with general vouchers, whilst section 10(19) deals with vouchers for specified goods or services. In the case of general vouchers, the VAT output liability is delayed until such a time that the voucher has been exchanged or redeemed for goods or services – this is the case since, at the time of issue of the voucher, it is unsure what those goods or services might entail. For example, a grocery voucher that could be spent on either standard-rated items or zero-rated fresh produce. In the case of vouchers for specified goods or services, the types of goods or services are already known at the point in time when the voucher is issued, and at which time the output tax is levied. In both instances, output tax is levied on the value of the voucher – but in the former situation, the timing can be significantly delayed, depending on how long the voucher is valid for.

MTN requested the court to confirm their treatment of “airtime vouchers” which can be spent on SMSs, data, or cell phone calls; and indeed, that it constituted a general voucher as opposed to a specified voucher. The court did not agree with MTN’s interpretation and indicated that the vouchers are indeed specified since it related to “airtime”. MTN would therefore accordingly be liable for output tax at the point in time when such vouchers are issued. Unfortunately, the court did not provide sufficient insights into their reasoning and the judgement has received substantial criticism from those in the industry.

We expect this judgement to go on appeal in 2021 as it could have a significant impact on any vendors who issue vouchers to the general public.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

27 Jan

VAT on the recovery of employee costs

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Tax consequences, recoveries, VAT

Companies are often faced with the dilemma where employees are employed in one group entity, but another group entity pays the salaries of those employees. This is often a challenge brought on by practical reasons, amongst others, only managing one payroll system group-wide, instead of a separate payroll system for each company. The payor company then re-charges the salary costs of those employees to the relevant group company. One is often confronted with the question of what the value-added tax (VAT) consequences of the fee recovery are.

The Value-added Tax Act (VAT Act) imposes VAT on the supply of goods and services by any vendor made in the course or furtherance of the vendor’s VAT enterprise. Therefore, if a company supplies services in the form of employee-related recoveries, it would be liable to account for output VAT in respect of the supply of those services, if those services form part of its enterprise.

“Supply” includes 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, irrespective of where the supply is affected. The broad construction of this expression means that most transactions subject to VAT will fall within the scope of this particular provision. “Services” are considered anything done or to be done, including the granting, assignment, cession or surrender of any right or the making available of any facility or advantage.

The VAT Act furthermore determines that where any vendor makes a taxable supply of goods or services to an agent who is acting on behalf of another person who is the principal for the purposes of the supply, the supply is deemed to be made to the principal.

The relevant issue to consider in these circumstances is the employment relationship. Does a company incur the employee costs as principal and then “on-charge” the costs to other group entities? Or, in the alternative, can the company be said to be an administrator, or so-called paymaster, for purposes of the payroll function? Therefore, how is the employment relationship defined? What is the substance of the employment relationship?

Suppose the employees are employed by company X (i.e. the contracts of employment are between the employees and company X). In that case, company X will be regarded as the principal recipient of the services supplied by the employees. Any recovery or on-charge of costs relating to such employees to another company will, under these circumstances, represent a charge for the supply of taxable services (the supply of the services of the employees) and will accordingly be subject to VAT.

On the other hand, where company X merely acts as the paymaster for the group, the respective employees will supply the services to the other group company as the principal recipient of the services. Under these circumstances, company X will be acting in the capacity of a paymaster Compare this, for example, to a situation where a company does not have a bank account and cannot practically pay its employees – an administrative arrangement will have to be made for that company’s employees to be paid.

Importantly, any additional fee charged to a company, by company X, for payroll administration services (i.e. not a mere recovery of the employment costs) will constitute consideration for a taxable supply and be subject to VAT (which we understand is sot currently the case).

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

23 Nov

Smart accounting, the smart way

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Tax accounting systems, Point of Sale, VAT

The last several years have seen an increase in “smart accounting systems” that have online capabilities and that can integrate with various other business solutions. These smart accounting systems have revolutionised traditional accounting, and there can be no question that many businesses run a more organised and financially sound operation as a result of the availabilities of these programs and applications.

While the benefits of using these systems speak for themselves, businesses should ensure that the data processing and back-end of these systems (which is often based overseas) are compliant with local value-added tax (VAT) legislation. A prevalent example is where Point of Sale systems integrate with these accounting packages – when customers swipe their cards or make online payments using the Point of Sale systems, they often get email notifications confirming they have paid. These confirmations are presented in the form of a “tax invoice”.

Subsequently, when the Point of Sale system integrates with the smart accounting package, the bulk sales of a day are imported into the accounting package by means of an invoice posting in the accounting package. Therefore, one sits with a situation where a customer has received a tax invoice from the Point of Sale application system and a second invoice, in respect of the same supply, which is generated when the Point of Sale system integrates with the accounting package. This results in two tax invoices having been generated in respect of the same supply. This is specifically prohibited in terms of section 20 of the Value Added Tax Act, which only allows one tax invoice to be issued in respect of each supply. The mischief that the legislature is trying to prevent is clear – when multiple tax invoices are issued in respect of the same supply, multiple VAT input claims can be claimed by vendors in respect of the same supply.

There are also various other smaller challenges with using smart accounting packages and ensuring that its operations are VAT compliant (including the requirements for a valid tax invoice, the circumstances under which you are allowed to issue credit notes, and certain default settings in respect of VAT percentages applied to certain transactions). Fortunately, these smart accounting systems allow for specific customisation and certain transaction flows to be conducted in a different way.

Compliance with local VAT legislation should therefore by no means be an impediment in using these systems, as long as businesses ensure compliance. The use of these systems should be promoted, but should be done with professional assistance and persons who have a keen grasp of both the accounting side of the systems, as well as tax legislation, especially during the set-up phase of the systems and new applications.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

4 Nov

Interest on delayed VAT refunds: The “materiality” question

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Tax Interest, SARS, VAT

Section 45 of the Value-Added Tax Act makes provision for the payment of interest on delayed VAT refunds. In terms of section 45(1) of the Act, the South African Revenue Service (“SARS”) must, within 21 business days after the date on which the vendor’s return in respect of a tax period is received, refund the vendor. This is provided that the VAT return is complete and not defective in any material respect.

The Tax Court recently considered the concept of “materiality” in such cases in the case of ABC Trading CC v the Commissioner for the South African Revenue Service (VAT case no 1712). SARS was liable to refund the vendor an amount of R71 229 183. ABC instituted legal proceedings against SARS in the Johannesburg High Court, applying for an order compelling SARS to pay the refund relating to the second period as well as interest on the outstanding capital refund amount. The interest component came to R3 570 115. Judgement was granted in favour of ABC.

However, SARS continued with an audit relating to the relevant VAT period and issued a finding that ABC failed to declare deemed output tax on the use of a motor vehicle by its member. The VAT amounted to R200.36 per month, for three months. Based on this deficiency, SARS tried to recall the interest refunded to the taxpayer. ABC objected and appealed SARS’s decision to recall the interest on the basis that the quantum of the output tax relating to fringe benefits (R601,09 in total) was “trifling and clearly immaterial”, and did not constitute “material incompleteness or defectiveness.”

The question before the court was whether ABC’s failure to declare the output tax on the fringe benefit rendered the returns that ABC had provided “incomplete or defective in any material respect” as provided for in section 45(1)(i) of the Act, and whether SARS’s decision to “write back” the interest by affecting an “adjustment” was justified. To put it differently: Were the jurisdictional factors, i.e. that ABC’s returns were “incomplete or defective in any material aspect”, present for SARS to invoke the provisions of section 45(1)(i)?

The court found that section 45 is a pragmatic provision not concerned with principle but with materiality. It recognises the fact that vendors may render returns that are incomplete or defective. If it were a matter of principle, then any defective or incomplete return would carry the consequence of SARS not having to pay interest. However, the Legislature, in its wisdom, determined that expedience trumps principle insofar as the payment of interest by SARS is concerned. The court further noted that in relation to one another, the “defect” and the amount owed by SARS is immaterial and the attempt by SARS to rely on the fringe benefit errors is a transparent attempt for SARS to ex post facto wriggle out of its obligations vis-à-vis ABC.

The important takeaway from the judgement is that SARS is liable for interest on delayed VAT refunds where there are no material deficiencies, and taxpayers should exercise their rights in this regard.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

4 Aug

SARS helping businesses lessen the tax load

sg-blog-admin

Finance News Provisional, Tax, VAT

The last few months have been extremely tough for small business owners as a result of the global COVID-19 pandemic, and various lockdown measures that have created a challenging trading environment. The South African Revenue Service (“SARS”) has identified this hardship, and as a result, the National Treasury recently tabled the Disaster Management Tax Relief Administration Bill, which would assist micro, small and medium businesses should they seek to utilise this relief.

Although many of these measures have applied in practise, they have not officially been included in a tax bill and will soon have the necessary legislative effect (once promulgated).

To be a candidate to claim relief, a small business must:

Have a tax compliant status;
Conduct a trade during the year of assessment ending after 1 April 2020 to 31 March 2021, and earn gross income of R100 million or less; and
Not more than 20% in aggregate of the gross income can come from interest, dividends, royalties, rental payments, annuities, or remuneration received from an employer (generally aimed at passive income).

The relief offered by the Bill covers the following:

Pay-As-You-Earn (“PAYE”) deferral

Employers can claim a four-month deferral relief from 1 April 2020. To claim, two options are available;

Employers are still required to submit full PAYE returns (EMP201). SARS will issue a statement of account reflecting the relief; or
Calculate the total payable at 65% of the total.

After 7 August 2020, SARS will determine an amount payable in six equal payments to cover the outstanding (deferred) liability.

Employment Tax Incentive (“ETI”)

This programme runs from April 2020 to July 2020 and is claimed in the monthly EMP201. To claim, an employer is required to calculate the total ETI and 65% of the PAYE. The employer then utilises the lessor of the total ETI, or 65% of the PAYE liability to claim relief.

Provisional tax deferral

The period runs from 1 April 2020 to 30 September 2020 for the first payment period, and from 1 April 2020 to 31 March 2021 for the second provisional payment period. The gist of this assistance is that companies are required to pay only 15% of the first provisional payments and 65% (after deducting the first 15%) of the second payment. The remaining 35% will be payable on the third provisional payment date to avoid interest charges on late payment.

Accelerated value-added tax (“VAT”) refunds

From 1 May 2020, VAT vendors can file monthly VAT claims as opposed to every 2 months. Category A vendors can claim this relief from April 2020 to July 2020, and vendors registered under category B from May 2020 to August 2020.

The above relief measures contained in the Disaster Management Tax Relief Administration Bill are bound to bring some welcome cash flow and liquidity relief to struggling SMMEs in South Africa.

For more information on these relief measures, visit www.sars.gov.za/media/pages/tax-relief-measures.

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