On 21 February 2018 the Minister of Finance, during the 2018 annual budget, announced that the VAT rate will increase by 1 percentage point to 15% effective from 1 April 2018.
VAT is essentially an inclusive tax, meaning that the price charged by a vendor includes VAT.
This also means is that any quote, price tag, advertisement or tender et cetera must include VAT, unless the price is clearly broken down into the value of the supply (excludes VAT), the amount of VAT and the total consideration payable (includes VAT).
In determining the applicable rate of VAT, the time of supply is crucially important as it determines when the VAT on that supply must be accounted for which ultimately determines the applicable rate.
In most transactions the general time of supply rules will apply. Cognisance must however be had for special time of supply rules as well as the transition rules that come into effect when there is a change in the VAT rate.
Time of Supply & Transition Rules
Section 9 of the Value-Added Tax Act 89 of 1991 (“VAT Act” or “the Act” and “section” applies to a section of the VAT Act) sets out the rules pertaining to the time of supply.
General Time of Supply Rule
The general rule is contained in section 9 (1) of the VAT Act which deem the time of supply as the earlier of
- the date of the invoice (obligation for payment); or
- the date of payment of any portion of the consideration is received.
Please note that these are deeming rules and no regard is had to the time the goods are delivered or the service rendered, unless specifically provided for.
The transition rules will however affect “premature” or “forced” time of supply transactions by vendors who seek to take advantage of timing anomalies and need to be aware of the anti-avoidance provisions where an invoice is for example rendered or payment is made following the announcement of the rate increase in an attempt to manipulate the actual flow of the transaction affecting the applicable VAT rate that could lead to a loss resulting for the fiscus. This is discussed in more detail later in this article.
As background, it is important to note that an invoice need not be a “tax invoice” to trigger the time of supply as an invoice is a document notifying an obligation for payment. However, if payment is only conditional i.e. a pro-forma invoice, there is no obligation and the time of supply rules are not triggered.
There are a number of specific time of supply rules which include rules for transactions between connected persons, fixed property and crucially the transition rules contained in section 67A.
When the transition rules apply, vendors must still account for output tax according to the time of supply rules, but the VAT rate to be used will be determined under the transition rules.
Fixed Property – Specific Time of Supply Rule & Specific Rate Rule – (Residential Property)
Section 9(3)(d) clearly identifies the deemed time of supply where goods consisting of fixed property or any real right therein is supplied under a sale as the earlier of
- the date of registration of the transfer in the Deeds Registry; or
- the date on which payment of any portion of the consideration is made.
It is however trite that the payment of a deposit does not constitute payment of any part of the purchase price.
Notwithstanding the above specific time of supply rules, due to the change in the VAT rate, the specific rate rules trump those of the time of supply rules during the affected period.
The effect of the transition rules is that notwithstanding the time of supply being triggered after 1 April 2018 (due to payment or registration of the property taking place after 1 April 2018), the supply of the residential fixed property could be subject to VAT at a rate of 14% provided that:
- the contract for the supply was concluded before 1 April 2018; and
- both the payment of the purchase price and the registration of the property will occur on or after 1 April 2018; and
- the VAT-inclusive purchase price was determined and stated as such in the agreement.
The first mentioned proviso specifically refers to the word “concluded”, which means offer and acceptance must have taken place prior to 1 April 2018. This is interpreted to mean that any conditions described in the agreement are not required to be fulfilled at that date.
The concession allowing the 14% VAT rate will only apply in respect of the sale of the following types of residential property:
- the sale of fixed property consisting of any dwelling together with the land on which it is erected; or
- any real right conferring a right of occupation of a dwelling or any unit in a sectional title scheme or of any share in a share block company which confers the right or an interest in the use of a dwelling; or
- the sale of fixed property consisting of land, for the sole or principal purpose of the erection of a dwelling by or for the purchaser on the land, as confirmed by the purchaser in writing; or
- the construction by a vendor carrying on a construction enterprise of any new dwelling.
Goods delivered or services performed before 1 April 2018
The rate to be applied remains at 14% in respect of all goods delivered and services performed prior to 1 April 2018. The transition rules do not apply if the time of supply has been triggered by the issuing of an invoice or payment being made.
It must be noted that non-residential fixed property is specifically excluded from the above provision.
Services performed before 1 April 2018, but payment made after 1 April 2018
(Specific case – Estate Agents)
The actual performance of a service rendered does of itself not determine the allocation of the relevant VAT period which must be applied together with the time of supply rules.
If we assume that the general time of supply rules are applied to a service rendered such as those offered by estate agents in obtaining buyer/s for specific property/ies, and further accept that the service is performed/completed prior to 1 April 2018 with completed service meaning an enforceable agreement being in place (enforceable agreement meaning that all conditions precedent contained in the agreement being complied with), the general time of supply rules remain the deciding factor.
The general time of supply rules deem the relevant VAT period to be the earlier of either (i) an invoice being rendered (what is actually required is payment obligation); or (ii) payment being made.
In the above example, if the services are performed/completed prior to 1 April 2018, but the invoice is only rendered after 1 April 2018 with payment also being made after this date, the time of supply rules will deem VAT period to be after 1 April 2018 and accordingly that the VAT rate applicable will be 15%. In this scenario one could be faced with the situation where the VAT rate applied to the sale of the property is levied at 14% but the agents commission at 15%.
One obvious solution may be to ensure that the obligation to pay is fixed prior to 1 April 2018 meaning that the invoice is rendered prior to 1 April 2018 as the time of supply is trigger prior to 1 April 2018. This may however only offer a workable solution in matters where the obligation to pay is valid and only the payment date is extended to beyond the 1 April 2018 effective date of the implementation of the 15% VAT rate.
Specific rules will however apply where services commenced prior to 1 April 2018 but was only completed after 1 April 2018. This is specifically dealt with in the category immediately following this. In summary, a reasonable apportionment of service rendered prior to and after the effective date of 1 April 2018 will have to be performed and the 14% and 15% rates will have to be applied accordingly.
Supplies starting before but ending after 1 April 2018
Where goods are delivered or services performed during a period commencing before 1 April 2018 but continuing after 1 April 2018, the VAT-exclusive price must be apportioned on a fair and reasonable basis and allocated to the respective periods. The rate will then be applied at 14% and 15% respectively on the value of the supply.
The above transition rule applies to
- rental agreements;
- goods supplied progressively or periodically;
- goods or services supplied in construction activities; and
- services rendered over the period concerned.
Supplies pertaining to fixed property which includes residential and non-residential fixed property is specifically excluded under these rules and treated in terms of the rules discussed earlier.
Goods delivered or services actually performed on or after 1 April in respect of contracts concluded between 21 February 2018 and 31 March 2018
Transition rules come into force where the deemed time of supply occurs between 21 February and 31 March 2018 (the period following the rate increase announcement but immediately preceding the effective date of the increase).
The transition rules have the effect that where goods are delivered on or after 23 April 2018 or service performed on or after 1 April 2018 but the time of supply is triggered between 21 February and 31 March 2018 as a result of any invoicing or payment in relation to the supply, VAT will be levied at the rate of 15%.
However, if the goods are delivered before 23 April 2018 (i.e. within 21 days after 1 April 2018), or the services are rendered before 1 April 2018, such supplies will be subject to VAT at a rate of 14%.
The specific rules however do not apply to the following circumstances:
- where it is an established business practice for payments to be made, or invoices to be issued prior to the supplies being made;
- transactions pertaining to the sale of residential property, certain real rights in residential property and shares in residential share block companies;
- the construction of a new dwelling by a construction enterprise.
These transition rules specifically apply to non-residential fixed property.
These transactions can be classified as avoidance transactions as time of supply rules are abused to give effect to an incorrect position leading to a loss to the fiscus, as mentioned earlier
The price increase resulting from the VAT increase may be recovered by the vendor from its customers. The exception would be if there is a specific agreement with the customer in writing stating that the price cannot be increased as a result of a VAT increase.
Where no such agreement exists, the vendors should inform their customers of the increase in the total contract price as a result of the increase in the VAT rate.
Whether or not the new rate of VAT is recovered from clients, the supplier must still account to SARS on the new rate as part of this consideration.
Quoted and advertised prices
As of 1 April 2018, vendors must ensure that all quotes, advertisements et cetera reflect the new VAT rate of 15%.
SARS have granted a specialisation to vendor’s, allowing them to display a notice clearly indicating that the price reflected does not include VAT at the new rate of 15% and that the price will be adjusted at the point of payment.
Debit and credit notes
Where debit or credit notes are used to correct or adjust historical supplies made, the rate of VAT to be used must be the same as the rate applied to the supply to which the debit or credit note relates.
The information and material published hearing provided for general purposes only and does not constitute legal advice.
We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on information contained in this document.