On 21 February 2018, the Minister of Finance announced in his Budget Speech that the standard rate of VAT of 14% would be revised upwards to 15%, as of 1 April 2018, in line with Government's drive to raise additional revenue. The ramifications of the VAT rate increase need to be considered by suppliers as it will impact on the correct amount of output VAT declared to SARS (taking into consideration that there may be supplies made before/on/after 1 April 2018). The issue of long-term contracts must also be considered. Applying the correct VAT rate is important as the output VAT liability to SARS is ultimately that of the supplier of the goods or services. If the correct rate is not applied, this would result in a commercial loss for the supplier and penalties and interest being imposed by SARS.
Long-term contracts and agreements entered into before 1 April 2018
The VAT Act contains a rule for long-term contracts or contracts/agreements entered into before the effective date of the VAT rate increase (ie, April 2018) but for which supplies would also be made on/after 1 April 2018. The supplier is entitled to recover the additional amount of VAT on account of the VAT rate increase, as long as the contract/agreement does not specifically prohibit such amounts from being recovered. A supplier/vendor needs to review existing agreements entered into as this may increase the total contract price for goods or services provided. In the event that the agreement specifically prohibits the new VAT rate from being charged, the supplier still needs to pay output VAT at the new rate (ie, 15%) to SARS.
Transitional rules for the VAT rate increase
The VAT Act also contains "transitional rules" for the increase in the VAT rate. These rules are very specific and at times can become esoteric - nonetheless, the rules have to be considered and, if applicable, the output VAT must be determined accordingly. Notwithstanding the fact that a specific transitional rule may apply, a vendor must still declare output tax to SARS in the tax period in which the normal time of supply rule is triggered. The general time of supply rule is the earlier of the time: (i) an invoice is issued by the supplier or recipient; or (ii) any payment of consideration is received by the supplier.
The transitional rules define when goods are deemed to be provided (ie, when they are delivered to the recipient) but does not define when services are deemed to be performed. This may lead to differences in interpretation and application. For goods supplied under a rental agreement, such goods are deemed to be provided when the recipient takes possession or occupation thereof. Further, where the goods consist of fixed property supplied by sale and transfer is effected by registration in the Deed's registry, the property is deemed to be delivered to the person when such registration is effected. The transitional (rate) specific rules are described as follows:
- Goods are provided or services are performed for the period before 1 April 2018 - VAT at the "old" rate would apply, irrespective of the time of supply of such goods or services (whether it occurs before or after 1 April 2018). In this rate-specific transitional rule "goods" exclude the sale of fixed property.
- Supplies commencing before and ending on/after 1 April 2018 - where goods are provided or services are performed during a period commencing before 1 April 2018 and ending on/after 1 April 2018, the value of the supply (ie, VAT exclusive amount) must be apportioned on a fair and reasonable basis with respect to the pre (ie, 14%) and on/after (ie, 15%) 1 April 2018 period. Typically, goods supplied under rental agreements, goods supplied progressively/periodically, goods or services supplied in the construction industry, or services rendered over the period of the agreement, would be applicable here.
- Goods are provided or services are performed on/after 1 April 2018 where the time of supply for such goods/services occurs between 21 February and 31 March 2018 - when goods are provided (ie, delivered) on/after 23 April 2018 (ie, 21 days after 2 April 2018), or services are performed on/after1 April 2018, VAT at the rate of 15% applies. This is essentially an anti-avoidance rule where a vendor triggers the time of supply but goods are provided 21 days on/after the day following the day of the effective date of the rate announcement or services are provided on/after 1 April 2018, the deemed time of supply for those goods or services is on the date on which the increase of the VAT rate becomes effective. In the instance that goods are provided before 23 April 2018 or services are performed before 1 April 2018, VAT at the rate of 14% applies.
- the above specific transitional rule does not apply to residential property or payments customarily made (or that become due), or invoices to be issued in terms of an established business practice for goods or services, still to be provided or performed (e.g. annual subscriptions that are paid or invoiced in advance before the underlying supply takes place).
- The sale of residential property - if a written agreement is concluded (ie, signed) before 1 April 2018 for the supply of fixed property and the price (ie, VAT inclusive amount) was stated in the said agreement and the time of supply of such fixed property (ie, earlier of registration in the Deed's registry or receipt of any payment in respect of the consideration for the supply) is deemed to take place on/after 1 April 2018, VAT at the rate of 14% applies. This is a concession rule and applies to: residential property consisting of a dwelling (including sectional title dwellings); a share in a share block company which confers a right to or an interest in the use of a dwelling; any real right conferring a right of occupation of land for the purposes of erection as a dwelling; and the construction of a new dwelling by a construction enterprise.
- Sales made in terms of lay-by agreements - where goods are sold in terms of a lay-by agreement or a service is supplied in relation to such agreement (ie, where such agreement is cancelled or is terminated and the seller retains any deposit paid by the purchaser), and such agreement was concluded before 1 April 2018 and the deposit to reserve the goods was paid before 1 April 2018, VAT at the rate of 14% is applicable.
The issuing of debit and credit notes
Although not part of any transitional rule, a vendor must pay special attention to the issuing of debit and credit notes as the adjustments must be done at the correct VAT rate. Once again, the general time of supply rule must be considered and the adjustment must be done accordingly (ie, when that original supply took place and for which an adjustment is made on/after 1 April 2018, via the issue of a debit or credit note).
The transitional rules may be cumbersome to apply and may present practical difficulties. However, any lapse in applying the correct cut-off dates stipulated in the transitional rules may lead to penalties and interest being levied by SARS.