VAT – Supply of services for contingent consideration

VATThe recent Taxation Laws Amendment Act_ 2013 (TLAA), proposed a new section dealing with time of supply rules for contingent services.

The proposed section 9(4)(b) of the Value Added Tax Act, No 89 of 1991 (the VAT Act) provides that

“where services are supplied under an agreement and the consideration for such services supplied in whole or part is not determined at the time that such services are rendered or performed, that supply shall be deemed to take place when and to the extent that any payment in terms of the agreement is due or is received or an invoice relating to the supply is issued by the supplier or the recipient, whichever is the earliest.”

A vendor must include a supply and calculate output tax in its VAT return if an invoice is issued during the tax period in terms of section 16(4) of the VAT Act. The tax is calculated on the tax inclusive consideration indicated on that invoice. Notwithstanding the general rule relating to the date of issue of an invoice, a supply will also be recognised if any payment is received by the supplier before the invoice is issued. However, the current issue is that while there are times of supply rules which apply under section 9 of the VAT Act under circumstances where goods have been supplied, even where the consideration cannot be determined upfront, the same provision does not extend to circumstances where services are supplied for a contingent consideration.

The immediate problem that arises is in transactions where the determination of the consideration for the supply is subject to various underlying factors, for example in the mining industry, where the price can only be determined on extraction of the metals and/or the average prevailing exchange rate at the time. Another example referred to in the Explanatory Memorandum of the TLAB, is where certain services are linked to future contingent events, such as the payment of risk services performed by a company linked to share price performance over a certain period of time. Another a situation that arises is where the payment for certain agency services supplied may be inextricably linked to the price of the underlying goods supplied. Section 9(4)(b) of the VAT Act has been proposed to counter these situations where services are offered for a contingent consideration and where no special time of supply rules are in place.

The reason for the proposal is to remove the anomaly and by implementing special time-of-supply rules that will apply to both goods and services, more specifically, where consideration for the performance still needs to be ascertained or can only be ascertained at a later date. The trigger date will occur on the earlier of the date when either payment is due or received or the date of invoice. The effective date for the proposed amendment is 1 January 2014.

Cliffe DekkerHofmeyr
VAT Act: Sections 9, 9(4)(b) and 16(4)