Employers often reimburse staff for a variety of costs, most of which bear VAT.
The VAT Act allows vendors as an input tax credit, any VAT incurred in respect of items acquired for the purposes of making taxable supplies. Deduction is also allowed where the supply was made to a person, acting on behalf of such vendor, who is the principal for the purposes of that supply, where the tax invoice is issued to such agent.
Even in the absence of a valid agency agreement, SARS used to allow an input tax deduction in respect of reimbursed costs, presumably on the basis that it would be contrary to the spirit of the Act to have a cascading of tax. (Irrecoverable VAT forms part of cost of sales resulting on tax being levied on tax.)
Recent SARS rulings indicate that even where employment contracts stipulate that certain costs are incurred by the employee as the employer’s agent, reimbursed cell phone costs are not incurred by the employee as an agent, premised on the fact that the cell phone contracts are not concluded by the employee acting as agent but in his personal capacity.
The SARS approach seems to disregard the principle of the undisclosed principal, which is well entrenched in South Africa law. In practice, the supplier would sue the agent in case of default, with the agent having a right of recourse against the undisclosed principal.
Can one hold a cell phone contract as principal and yet agree to make certain calls as the agent of another? According to SARS, such costs are a necessary concomitant of the employee’s remunerated services; a simple reimbursement and not the refund of an agent’s costs.
May accommodation and travel costs be incurred as the agent of one’s employer? SARS recently ruled that SAICA membership cannot be held as agent of the employer as SAICA’s constitution does not allow for corporate membership and hence, no VAT deduction for the employer. Can one fly on behalf of someone? A corporate entity cannot fly, eat or sleep. SARS logic suggests that reimbursements of such costs would not allow the employer a VAT deduction as the individual would not be an agent of the employer.
A meal or hotel service can hardly be consumed as the agent of another. The VAT Act merely requires the supply to be made to a person acting as the agent of another person who is the principal for that supply – as he would be if instructing the employee to acquire the supply in a representative capacity. In such a case, it is submitted, the supply would be made to a person acting as an agent of another person, who would be the principal in acquiring such supply – so too where an employment contract determines that business calls are made in a representative capacity.
Simply have the tax invoices issued to the employer? Input tax is defined as tax charged by a supplier on supplies made to the vendor, not to its employees. If the individual were not acting as representative of the employer to begin with, having the invoices issued to the employer would arguably amount to tax evasion with potentially serious repercussions as the VAT would not constitute “input tax” as defined.
As it stands, many vendors appear to be contravening the SARS interpretation of the VAT Act when deducting the VAT in respect of costs reimbursed to employees and are at risk of being assessed for tax, penalties and interest.