Deemed Vat Supplies
26 October 2016
By: Keelen Snyders and Willem Bam, BDO South Africa
The VAT treatment of payments received from Government is often uncertain which can lead to the incorrect treatment by a VAT vendor, leaving the vendor exposed to an output tax liability, penalties, understatement penalties and interest.
In the recent Supreme Court of Appeal (SCA) case CSARS v Marshall NO (October 2016) the South African Red Cross Air Mercy Service Trust (the Trust) received payments from Government for the supply of aero-medical services to provincial health departments. The Trust was a vendor and welfare organisation for VAT purposes.
The crisp issue for consideration in this case was whether the payments constituted consideration for a ‘deemed’ as opposed to an ‘actual’ supply of services by the Trust to Government. An actual supply of services to Government would be subject to VAT at the standard rate (14%) and a deemed supply would be subject to VAT at the zero-rate (0%).
The Trust initially applied to SARS for a Binding Private Ruling. SARS ruled that the payments received constituted consideration for an actual supply of services to Government and that the Trust should account for VAT at the standard rate. The Trust then sought a declaratory order from the High Court confirming that the ‘actual’ supplies should be subject to the zero-rate. The High Court concurred that the Trust should account for VAT at the zero-rate.
The Commissioner for the South African Revenue Service appealed to the SCA against the decision of the High Court. The SCA held that the Trust should account for VAT at the standard rate as the payments were received by the Trust as consideration for an ‘actual’ supply of services by the Trust to Government.
VAT vendors should take care in considering the VAT implications arising from funding received from Government. It is a common misconception that all funding received from Government is not subject to VAT or subject to the zero-rate, especially where the recipient is a welfare organisation. As is evident from this case, where an actual supply is made to Government, a VAT vendor will generally be required to account for VAT at the standard rate on the supply (unless an exemption or zero-rating provision applies). Vendors should also tread carefully where funding (for example, a grant) is received from Government for a specific purpose (other than supplying goods or services to Government). In such a case, the vendor could be deemed to make a taxable supply of services to Government which deemed supply could be subject to VAT at either the standard or zero-rate.
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