VAT – Non supplies and charges

taxation 7For a transaction in South Africa to attract value-added tax (VAT), there should be a supply of goods or services by a vendor in the course or furtherance of an enterprise.

Consider the following scenario:

A and B, both vendors for VAT purposes, have a business arrangement whereby, for example, B provides consulting and management services to A. It transpires, in the course of their business arrangement, that A requires the use of a rented vehicle. B agrees to arrange for the vehicle. B enters into a rental agreement with C, also a VAT vendor, and the vehicle is made available for the benefit of A. C subsequently invoices B for R100 plus VAT of R14 and B pays C the R114. Naturally, B seeks to recover the cost from A. B does not wish to recover anything in excess of the cost from A because A is a good client. How should B deal with the recovery of the cost from a VAT perspective?

B is faced with two possibilities:

  • Firstly, B could issue an invoice to A for R100 plus VAT of R14. B could claim the R14 input VAT in respect of the payment made to C, but would also have to account to the South African Revenue Service (SARS) for the R14 VAT charged to A. Since A would be in possession of a VAT invoice, it could claim the R14 VAT paid to B from SARS.
  • Secondly, B could consider simply presenting the invoice from C to A for payment in order to recover his cost.

The first possibility is an administratively intense process but appears to carefully follow the so-called ‘VAT chain’. However, a fundamental question that needs to be asked is whether B actually made a supply to A (and if so, what the nature and value of that supply is), or whether it was C who made a supply to A. The matter is complicated by the fact that one is probably dealing with a contract (between B and C) for the benefit of a third party (A).

In the case of CSARS v British Airways PLC [2005] 67 SATC 167, it was held that VAT will only be levied on actual supplies made and that the receipt of money is not a supply subject to VAT. In this case, the issue that needed to be determined was whether British Airways was required to charge VAT on that part of its ticket price constituting a ‘passenger service charge’. The passenger service charge is levied by Airports Company Limited on aircraft operators such as British Airways. However, British Airways would recover this ‘passenger service charge’ from its passengers as a direct on-charge on its tickets (account for separately). SARS sought to recover output VAT from British Airways; however the court held that the charge was in respect of a service supplied by the Airports Company Limited and not by British Airways. Accordingly, British Airways was not required to charge VAT on the recovery of the passenger service charge. British Airways was simply recovering it directly from its passengers. Effectively, the court held that Airports Company Limited was liable to account for the output VAT as it was making the supply.

In light of this judgment, the first possibility might not necessarily be the correct approach. C made a supply to B for the benefit of A, but did B make a supply to A? B certainly did not on-rent the vehicle to A. If anything, B supplied a procurement service to A. In this regard B could, for example, charge a R1 fee to A (plus VAT of R0.14) in respect of the procurement service.

The second possibility is administratively very simple. B would raise a tax invoice to A in respect of the usual consulting and management services supplied to A, but would simply present the invoice from C to A for payment. B could, of course, consider charging a procurement fee to A, on which B would have to account for output VAT.

Should B decide to handle the transaction in terms of the second possibility, A could potentially find itself in a position where it would not be able to claim any input VAT in respect of the supply of the rental vehicle. This is so because A will not be in possession of a tax invoice reflecting its details, the invoice from C having been made out to B.

Cliffe Dekker Hofmeyr
VAT Act: Section 7(1)(a), 11 and Practice Note No.11