Author: Carmen Moss Holdstock (Cliffe Dekker Hofmeyr)
An amendment has been proposed in the 2014 Budget Speech which seeks to clarify Interpretation Note 57 on the VAT treatment of a going concern, specifically the requirement that a vendor must be a registered vendor at the time the sale agreement is concluded.
The sale of a business as a going concern, in simple terms, means that the business (or part thereof) is capable of being operated as a stand-alone business in its own right. An example of such a sale would be where a purchaser conducts a letting enterprise from a property and has decided to exercise an option to acquire the property from the seller in terms of the lease agreement, or in the case of a property developer’s enterprise, the transfer of its developed and undeveloped properties (essentially constituting trading stock) to a third party.
Under normal circumstances, if the seller is a VAT vendor, such a sale (like most other sales) would attract VAT at the standard rate of 14%. This would remain the case if the purchaser of the business is not registered for VAT. However, National Treasury has recognised that, in most cases, the purchaser of such a business is also likely to be registered as a VAT vendor, and would simply claim the VAT paid as an input tax credit.
Given that the transaction as a whole ends up with no additional VAT coming to the South African Revenue Service (SARS), the Value-Added Tax Act, No 89 of 1991 (VAT Act) provides for transactions of this nature to be zero-rated. In other words, VAT is charged at 0%. This results in major relief to the purchaser’s cash flow, since the time-lag between paying out the VAT to the seller, and then claiming it back from SARS, is eliminated.
Based on the provisions of s11(1)(e) of the VAT Act, in order to dispose of a going concern at the zero rate of VAT, the following requirements, among others, must be met:
- the parties must agree in writing that the enterprise is disposed of as a going concern; and
- the supplier and the purchaser must be registered VAT vendors.
The requirements listed under s11(1)(e) of the VAT Act essentially connotes what a ‘going concern’ entails. In other words, where the requirements under s11(1)(e) of the VAT Act are not met one is not dealing with a ‘going concern’ and s11(1)(e) of the VAT does not apply. Where s11(1)(e) of the VAT Act does not apply the zero rate cannot not be used, meaning the standard rate of 14% becomes applicable.
At the time the sale agreement was concluded the situation arose where the purchaser, however, was not yet registered as a vendor and would only become registered once the sale agreement was in place. Interpretation Note 57 provides that, if the purchaser is not registered as a vendor at the time of the conclusion of the agreement, then the agreement would normally have contained a provision stating that the zero rate would only apply subject to the purchaser being a registered vendor with effect from the date that the agreement was concluded.
SARS requires a prospective vendor to submit invoices before the vendor can be registered as a vendor. In other words, unless the vendor could prove that it had made taxable supplies, SARS was unlikely to register the entity as a vendor, which led to anomalies. Otherwise you may well end up in a scenario where VAT is payable and where a VAT input credit must be claimed by the purchaser, which would unfortunately result in an audit and a delayed refund, even up to six months. Effectively where the vendor was not a registered vendor at the time, it would create an anomaly and could result in applications being made to SARS to retrospectively register the purchaser with effect from the date of the supply of the sale agreement.
The Commissioner for SARS has issued a proposal in the 2014 Budget Speech, whereby SARS intends clarifying the position of whether a person must be a registered vendor before the acquisition of a going concern. If this amendment is effected it would certainly provide clarity and eliminate the anomalies arising where the vendor was not a registered vendor at the time that the sale agreement was concluded.