VAT Intermediate CPD June 2019 Webinar Mahomed Kamdar

VAT Intermediate CPD – June 2019 Webinar - Mahomed Kamdar

CONTENTS – VAT CPD 1. 2. 3. 4. 5. 6. 7. 8. 9. What is VAT? The nine requirements of VAT! Vat in the Republic Supplies to independent foreign branch Generals remarks: Open market value (OPM) & consideration Vouchers Discount vouchers E-bucks Change of use VAT CPD – April 2019 2

What is VAT? VAT-Introduction What is Value-Added Tax? § VAT is an indirect tax, which is imposed on the sale or purchase of goods and services whenever a transactions in concluded between two parties § Generally designed to tax the final consumption of goods and services but are collected from the suppliers of these goods and services. VAT CPD April 2019 3

VAT CPD April 2019 4

VAT: General remarks Output tax (seller) Input Tax (buyer) Supplier recipient Receives consideration receives good and/ or services Supplies good and/ or services pays the consideration VAT CPD April 2019 5

Nine requirements for VAT Person Goods/ Services Vendor Recipient / supplier VAT Enterprise Transaction (Taxable supply) Invoice In the Republic or partly Consideration VAT CPD April 2019 6

VAT – Republic VAT is only applicable to transactions for supplies which occur or the supplies are used in the Republic of South Africa. The “Republic”, is defined as the territory of the Republic of South Africa and includes the territorial waters, the contiguous zone and the continental shelf referred to respectively in sections 4, 5 and 8 of the Maritime Zones Act, 1994 (Act No. 15 of 1994) VAT CPD April 2019 7

Related party transactions Public Sector Financial Reports 8

Related party transactions Legally related parties Branches Group Dependent Independent Subsidiaries (No separate records) (Separate records & geographic) (Separate legal entity) Public Sector Financial Reports 9

Supplies to independent foreign branches However, the zero-rating of exported and services will not apply in the following situations: - If the services are supplied to any person who is in RSA at the time the services are rendered (presumably consumed in RSA & no zero-rating) - Services supplied directly in connection with land situated in RSA - If services are supplied directly in connection with movable property situated in RSA – at the time when the services are rendered - consumption could be either in RSA or outside RSA. - If consumption is in RSA – no zero-rating } next slide If consumption is outside RSA – service is zero-rated } next slide VAT CPD April 2019 10

Brain Twister Company A (manufactures natural wood African crafts) received a request from a museum in Europe to provide some craft work with specific instructions that it should be sandblasted to provide a natural glow in finishing. Company A uses Company B to sandblast and perform the finishing of the crafts. Both companies are RSA resident companies and registered VAT vendors. Discuss the VAT implications to the RSA resident companies for the goods requested by the European customer. Public Sector Financial Reports 11

Supplies to independent foreign branches s se ha d oo g Use exclusively for taxable supplies – 100% c ur P ply Supply goods Sup agre eme VAT CPD April 2019 nt 12

Measuring non-monetary consideration When a transaction is concluded for a non-monetary consideration, then the open market value (includes VAT) must be used. OMV represents the consideration of a similar supply under similar circumstances and a supply freely offered between unconnected persons. If the OMV cannot be determined then a valuation method can be used that is approved by the Commission which provides a sufficiently objective approximation of the consideration. VAT CPD April 2019 13

Vouchers § The first type – allows bearer to specific monetary value. Vouchers purchased as gifts. It entitles the bearer to receive goods or services for a specific monetary value stated on the face of the voucher. The issuing of these vouchers does not attract VAT is triggered when the voucher is redeemed and constitute payment for a good or service. Brain Twister Discuss why the VAT trigger is deferred? Discuss what happens when the voucher expires or is never used by the holder? VAT CPD April 2019 14

Vouchers § The second type entitles the bearer to receive a specific goods or services specified on the voucher. In the context of hotels and hotel chains, the coupons and vouchers are often used to permit guests to stay at various hotels at different locations for a predetermined number of days. Brain Twister Discuss why the VAT trigger is deferred? Discuss what happens when the voucher expires or is never used by the holder? VAT CPD April 2019 15

Discount Vouchers Two types of vouchers: 1) Issued and redeemed by the same suppler Issued discount vouchers to promote the sale of own goods - the issue of discount vouchers has no VAT consequences. Brain Twister Discuss VAT implication when discount vouchers are issued by a supplier. VAT CPD April 2019 16

Discount Vouchers (continued) 2) Discount vouchers issued and redeemed by different suppliers Issued by person who is not the supplier of the goods, the redemption of the discount voucher does not reduce the consideration for the supply. Brain Twister Discuss VAT implication when discount vouchers are issued by one supplier but redeemable another supplier. VAT CPD April 2019 17

Discount Vouchers (example) Major retail store sells tea bags for insertion in tea cups Manufacturer of tea bags would like to increase it’s sales and they offer a discount voucher of R 10 for each box of tea bags (100 in a box). The price of the retailer before the discount for the box of tea bags was R 120. The consideration for the supply will be R 110 cash (R 120 less R 10) plus the discount voucher. The retail store has to account for VAT on the full R 120 and includes the VAT. The retailer recover the voucher value from the manufacturer. VAT CPD April 2019 18

e. Bucks provider (e. g. FNB) h s a e C Supplier of goods (e. g. Makro) B u c k s Customer (received e. Bucks) e B u c k s VAT CPD April 2019 19

Change of use Four scenarios 1) Goods or services acquired wholly or partly for making taxable supplies and then subsequently applied wholly for private or exempt use 2) Goods or services acquired wholly for the purposes of making non-taxable supplies and then subsequently applied for making taxable supplies 3) Where capital goods are used for taxable purposes the extent of use changes - it could increase, for example from a taxable use of say from 30% in Year A, and increase to 60% in Year B. 4) Where capital goods are used for taxable purposes the extent of use changes - it could decrease, for example from a taxable use of say from 60% in Year A, and increase to 30% in Year B. VAT CPD April 2019 20

Change in use: General principles - does not apply if input tax has been denied e. g. motor car or entertainment - the rules for 2 nd goods must apply – lower of price paid (adjusted cost) or the OMV - adjustment made on the date of change of use - The rate applied for calculating the input and output at the date there is a change in use must the rate applicable at that date. E. g. if the change in use relates to a capital good acquired before 1 April 2018 but the change occur after 1 April 2018, then the rate of 15% must be used (ratio of 15/115). Public Sector Financial Reports 21

Change of use 1 st scenario 1) Goods or services acquired wholly or partly for making taxable supplies and then subsequently applied wholly for private or exempt use An output tax must be claimed = 15/115 X OMV (NB): An illustrative example: A retailer of bicycles purchased 20 bicycles to be sold to his customers. Each bicycle cost R 1150 and since it was intended for resale, the input tax was claimed at the time of purchase. The retailer decided to take the two bicycles for his private use, namely for his twin sons!. The bicycles sell for R 2 300 each. What is the output tax? VAT CPD April 2019 22

Change of use 1 st scenario (continued) Solution The output tax = (15/115 x R 2 300) x 2 = R 600. NB: - OMV is used but if the extent of use merely decreases but is still above 0% - another section of the Act is used VAT CPD April 2019 23

Change of use 2 nd scenario Goods or services acquired wholly for the purposes of making non-taxable supplies and then subsequently applied for making taxable supplies The input tax is calculated as follows: A X B X C X D A = the tax fraction B= the lesser of : - adjusted cost (incl. Vat ) of the goods and services, or - OMV of the goods or services - when changed use C = the % increase in taxable use of goods or services – an increase to 95% or more deemed to be 100%, and D = if the good is a 2 nd hand good, then % of consideration paid VAT CPD April 2019 24

Change of use 2 nd scenario (cont) illustrative examples: Citizen X purchased a personal computer at an adjusted cost of R 23 000 (incl. VAT and new) for personal use. Subsequently he/she decided to use the computer entirely (100%) for enterprising purposes. The OMV value at the date of change of use was R 9 200 (incl. VAT) The input tax implication is: 15/115 x R 9 200 = R 1 200. VAT CPD April 2019 25

Change of use 2 nd scenario (continued) After purchasing a private resident, Citizen X decided to used 80% of his private residence as an office. Originally purchased for R 1 000 but paid only 50% of the cost before the change of use. The open market value at the date of change of use is R 1, 5 m. The input tax implication is: 15/115 x R 1 000 (*) x 80% x 50% (**) = R 52 173. 91 * Use the lesser of cost or the open market value ** therefore, use 50% because only half the cost of the property was paid for! VAT CPD April 2019 26

Change of use 3 rd scenario Where capital goods are used for taxable purposes the extent of use changes - it could increase, for example from a taxable use of say from 30% in Year A, and increase to 60% in Year B. A X B X C A = tax fraction B= the lesser of : calculated - adjusted cost (incl. Vat ) of the goods and services, (but for connected persons use OMV or use B as per previous formula (slide 35), or - OMV of the goods or services - when changed use, or OMV on the date of the previous increase/ decrease use was cost VAT CPD April 2019 27

Change of use 3 rd scenario (continued) Where capital goods are used for taxable purposes the extent of use increases changes - additional input tax may be claimed at the end of the year of assessment This will not apply when - When the adjusted cost of capital goods is less than R 40 000 (exc VAT). - When `B’ in the previous formula was less than R 40 000 The increase or decrease in usage is less than 10%, or does not apply if input tax has been denied eg motor car or entertainment VAT CPD April 2019 28

Change of use 3 rd scenario (continued) Illustrative example Citizen X, a vendor, acquires a capital good at a cost of R 100 000 (excl. VAT) before the change in the VAT rate and the asset is partly (60% taxable supplies) for his enterprising purposes for to produce taxable supplies. After the change in tax VAT rate, the usage of the capital goods was increased produce 80% taxable supplies. The open market value is R 135 000. Adjusted cost: R 100 000 x 114/100 = R 114 000 (input tax was claimed at 14%) The additional input tax to be claimed on lower of the adjusted cost or OMV. Input tax claimed = 15/115 x R 114 000 x 20% (80% - 60%) = R 2 974 VAT CPD April 2019 29

Change of use 4 th scenario Where capital goods are used for taxable purposes the extent of use changes - it could decrease, for example from a taxable use of say from 60% in Year 1, and decrease to 30% in Year B. A X B X C A = tax fraction B= the lesser of : - adjusted cost (inc Vat ) of the goods and services, (but for connected persons use OMV or use B as per previous formula (entrance) , or - OMV of the goods or services - when changed use, or - OMV on the date of the previous increase/ decrease use was calculated if the OMV was lower than the adjusted cost VAT CPD April 2019 30

Change of use 4 th scenario (continued) Where capital goods are used for taxable purposes the extent of use decreases – output tax may be levied at the end of the year of assessment This will not apply when - When the adjusted cost of capital goods is less than R 40 000 (excl. VAT). - When `B’ in the previous formula (slide 35) was less than R 40 000 - The increase or decrease in usage is less than 10%, or does not apply if input tax has been denied e. g. motor car or entertainment VAT CPD April 2019 31

Change of use 4 th scenario (continued) Illustrative example Citizen X, a vendor, acquires a capital good at a cost of R 115 000 (incl. VAT) after the change in the VAT rate, and was used partly (60% taxable supplies) for his enterprising purposes for R 115 000 (incl. VAT). The open market value is R 98 000. The capital good was used to produce only 45% taxable supplies. Originally, input tax was claimed at R 115 000 x 15/115 x 60% = R 9 000. The additional output tax to be levied: = 15/115 x R 98 000 x 15% (60% - 45%) = R 1 917 VAT CPD April 2019 32

Change of use – comprehensive example : increase / decrease use Year 1 Citizen X, a vendor, acquires a capital good at a cost of R 155 000 (incl. VAT) which was partly used (60%) to produce taxable supplies. The open market is R 135 000. The capital good was subsequently used to produce 80% taxable supplies. Originally, input tax was claimed at R 115 000 x 15/115 x 60% = R 9 000. The additional input tax to be claimed 15/115 x R 115 000 x 20% (80% - 60%) = R 3 000 (input tax adjustment) VAT CPD April 2019 33

Change of use – comprehensive example : increase / decrease use Year 2 In the next year, the capital good was used to produce 45% taxable supplies. The OMV at the date of change was R 100 000. The additional output tax to be levied 15/115 x R 115 000 x 35% (80% - 45%) = R 5 250 (output tax adjustment) NB: OMV must be ignored as the amount used for previous changes must be used – cannot use the OMV at the date of change. VAT CPD April 2019 34

Change of use – comprehensive example : increase / decrease use Year 3 In the third year, the capital good was only used to produce exempt supplies. The OMV at date of change was R 150 000. 15/115 X R 150 000 (use the OMV) = R 19 565 (output tax adjustment) NB: this is not regarded as a change in degree of usage but an exit from taxable supplies – principles of Scenario 1 apply (based on the OMV at the date of exit). Additional input tax relief – s 16(3) (h) 15/115 x R 115 000 x 55% (100 – 45%) = R 9 684. 95 (input tax adjustment) VAT CPD April 2019 35

Change of use – comprehensive example : increase / decrease use Taxable supplies Exempt supplies Date purchased 60% of input tax claimed 40% of input tax paid is denied Year 1: 80% of input tax is 20% of input tax paid is claimed – adjusted by 20% denied – adjustment of 20% claimed Year 2: 45% of input tax is claimed – adjustment of 35% reversed as output tax 55% of input tax paid is denied – adjustment of 35% was reversed as output tax Year 3: 100% output tax is charged on the OMV 100% of input tax paid is denied – 55% of input tax was never claimed (refer to Year 2) a tax relief against output tax charged Public Sector Financial Reports 36

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