Pitfalls of the rapid U-turn on VAT amendments
Pitfalls of the rapid U-turn on VAT amendments
By Doria Cucciolillo, Assistant Manager and Cliff Watson, Director
In the 2025 National Budget, National Treasury announced the controversial increase in the standard rate at which value-added tax (‘VAT’) is levied to raise additional revenue in its quest to combat the fiscal deficit. In South Africa, the standard rate of VAT has been kept relatively stable with the only change in about a quarter of a century comprising an increase in such rate from 14% to 15% that became effective from 1 April 2018. This year, National Treasury announced a further increase in the standard rate of VAT which it intended to implement in two phases, namely an increase in the standard rate of VAT to 15.5% with effect from 1 May 2025, followed by a further increase to 16% with effect from 1 April 2026. The increase in the VAT rate was accompanied by certain concessions aimed at shielding lower-income households from the additional costs that would have otherwise been experienced due to the VAT increase. This was done by extending the list of basic foodstuffs that are subject to VAT at the zero rate.
At first sight, these changes may appear straightforward. However, it imposed a substantial administrative burden on some vendors to ensure that their sales and billing systems were timeously updated to correctly process transactions for VAT purposes from 1 May 2025, when the VAT changes were to have taken effect. On 24 April 2025, National Treasury issued a media statement indicating that it would reverse the VAT rate increase and the measures to cushion lower income households against the potential negative impact of the rate increase. This appears to indicate withdrawal of the concession of extending the list of basic foodstuffs that would have been zero-rated for VAT. However, Government Gazette 6157 issued on 24 April 2025 still mentions an amendment to Schedule 2 of the VAT Act. Vendors are advised to not apply the zero rate until such time that the Revenue Amendment Bills are enacted.
Since this announcement was made shortly before 1 May 2025, when the VAT changes would have taken effect, some vendors may not have had sufficient time to reverse changes already made to their systems to account for the VAT changes. As a result, vendors may inadvertently levy output tax at an inappropriate rate on the supply of goods or services on or after 1 May 2025, for example by levying output tax at the standard rate of 15.5% on supplies that should have been subject to a standard rate of 15% or by zero-rating items that should not have been zero-rated. This article considers the potential VAT consequences for the supplying vendor as well as the customer where these errors occur.
In a media release, the Commissioner for SARS announced that vendors have until 15 May 2025 to amend their systems to account for VAT at the standard rate of 15% rather than 15.5% in respect of the supply or acquisition of goods or services. Evidently, if a supplying vendor is unable to amend its system to account for VAT at the standard rate of 15% from 1 May 2025, the output tax on some or all standard rated supplies made from 1 May 2025 until 15 May 2025 would be incorrectly levied at 15.5%. If this is the case, the Commissioner advised that, when completing the VAT 201 return, the output tax levied at the standard rate of 15.5% must be declared in field 12 (“Other and imported services”). Where output tax was levied at the standard rate of 15%, the vendor must declare the consideration for the supply of the goods or services (i.e. the VAT inclusive amount) in the applicable field as usual, namely field 1 (“Standard rate (excluding capital goods and/or services and accommodation”) field 1A (“Standard rate (only capital goods and/or services)”). The VAT 201 return will automatically calculate the output tax in respect of these supplies by applying the tax fraction of 15/115 to the consideration entered into field 1 and/or field 1A. Consequently, the output tax actually charged in respect of the supply of goods or services, whether levied at a standard rate 15% or 15.5%, must be declared and taken into account by the supplying vendor in determining the VAT payable or refundable for the VAT period.
From the customer’s perspective, the input tax claimable in respect of goods or services acquired that were subject to VAT at the standard rate of 15% must be declared on the VAT 201 return as usual by completing the input tax, calculated as 15% of the value of the supply, in the appropriate field on the VAT 201 return. However, if VAT was levied at a standard rate of 15.5% on the supply of the goods or services to such vendor, input tax calculated at 15.5% of the value of the supply must be completed as an adjustment in field 18 (“Other”) of the VAT 201 return. Therefore, the input tax actually incurred in respect of the acquisition of the goods or services, whether levied at a standard rate of 15% or 15.5%, must be claimed and taken into account in determining the VAT payable or refundable for the VAT period.
Of course, a supplying vendor has the option to rectify the position where output tax was wrongfully levied at a standard rate of 15.5% rather than 15% by issuing a credit note and refunding the customer for the additional VAT of 0.5% charged. Such a refund will trigger output tax in the hands of the customer if that customer is a vendor that was entitled to (and did in fact) claim input tax on the goods or services acquired. In completing the VAT 201 return, the vendor would, if an input tax deduction was claimed, have been required to claim the input tax claimable at 15.5% of the value of the supply in field 18 of the return. If that vendor is subsequently refunded for the additional 0.5% VAT charged, the customer must declare output tax, to the extent that an input tax deduction was initially claimed for the VAT so refunded, for that refund in field 12 of the VAT 201 return. On the other hand, the supplying vendor would be entitled to claim an input tax deduction for the VAT refunded, which should be disclosed in field 18 of the VAT 201 return. Importantly, the supplying vendor must be in possession of a valid credit note substantiating such input tax claim.
The Commissioner provided no guidance on the declaration of the supply of basic foodstuffs that were wrongfully zero-rated due to systems not being timeously updated to account for VAT at the standard rate on the supply of these products. In this regard, the Commissioner merely advised that vendors who have already updated their systems to zero-rate the additional basic foodstuffs that would have qualified for the zero-rating, are encouraged to reverse those changes before 1 May 2025. In the absence of specific guidance and considering the prevailing provisions of the Value-Added Tax Act (‘the VAT Act’), adverse implications may arise for the supplying vendor in this regard. The supplying vendor must account for output tax on the supply of these goods at the standard rate of 15% of the consideration for the supply of these goods as it did not qualify for zero-rating in terms of the VAT Act. If a vendor is required to levy output tax on a supply but fails to do so, the consideration charged for the supply is deemed to include VAT at the standard rate. If the supply was zero-rated, the price charged for the supply would not have been adjusted to include VAT at the standard rate of 15%, resulting in a loss to the vendor. Vendors are however allowed to issue credit notes to reverse the initial supply at the zero rate and reissue a tax invoice which includes the 15% VAT. Retailers would however find it difficult where most of these goods are sold at a point of sale and the recipients are not identifiable. On the other hand, the customer would, if that person is a vendor who acquired the goods for purposes of making taxable supplies, not be able to claim an input tax deduction. An input tax deduction may only be claimed if a vendor is in possession of a valid tax invoice. One of the requirements for a valid tax invoice is to contain either the following: 1) the value of the supply, the amount of VAT charged and the consideration for the supply or 2) the consideration for the supply together with either the amount of VAT charged or a statement that it includes a VAT charge along with the rate at which the VAT was charged. Evidently, if VAT was incorrectly levied at the zero rate on the supply of these goods, the tax invoice that was issued will include no VAT. In the case where the supplier issues a credit note and a new tax invoice with the VAT charged, the recipient vendor will be entitled to claim the VAT based on the standard requirements when claiming input tax.
Although this article focusses on the VAT-specific implications of the reversal of the VAT changes, one should also bear in mind that the VAT implications of a transaction may have a knock-on effect to the income tax consequences thereof. If a taxpayer is entitled to an income tax deduction in respect of the cost of goods or services acquired or if such amounts qualify as part of the base cost of an asset for capital gains tax purposes, the amount taken into account for income tax purposes must exclude the input tax to which the taxpayer is entitled. Similarly, the amount included in gross income in respect of the supply of goods or services, or taken into account as proceeds on the disposal of an asset for capital gains tax purposes, must exclude the output tax levied.
Clearly, the rapid implementation and withdrawal of changes in VAT provisions may result in some practical difficulties for vendors. Where uncertainty arises, we recommend consulting a reputable tax advisor.
In the 2025 National Budget, National Treasury announced the controversial increase in the standard rate at which value-added tax (‘VAT’) is levied to raise additional revenue in its quest to combat the fiscal deficit. In South Africa, the standard rate of VAT has been kept relatively stable with the only change in about a quarter of a century comprising an increase in such rate from 14% to 15% that became effective from 1 April 2018. This year, National Treasury announced a further increase in the standard rate of VAT which it intended to implement in two phases, namely an increase in the standard rate of VAT to 15.5% with effect from 1 May 2025, followed by a further increase to 16% with effect from 1 April 2026. The increase in the VAT rate was accompanied by certain concessions aimed at shielding lower-income households from the additional costs that would have otherwise been experienced due to the VAT increase. This was done by extending the list of basic foodstuffs that are subject to VAT at the zero rate.
At first sight, these changes may appear straightforward. However, it imposed a substantial administrative burden on some vendors to ensure that their sales and billing systems were timeously updated to correctly process transactions for VAT purposes from 1 May 2025, when the VAT changes were to have taken effect. On 24 April 2025, National Treasury issued a media statement indicating that it would reverse the VAT rate increase and the measures to cushion lower income households against the potential negative impact of the rate increase. This appears to indicate withdrawal of the concession of extending the list of basic foodstuffs that would have been zero-rated for VAT. However, Government Gazette 6157 issued on 24 April 2025 still mentions an amendment to Schedule 2 of the VAT Act. Vendors are advised to not apply the zero rate until such time that the Revenue Amendment Bills are enacted.
Since this announcement was made shortly before 1 May 2025, when the VAT changes would have taken effect, some vendors may not have had sufficient time to reverse changes already made to their systems to account for the VAT changes. As a result, vendors may inadvertently levy output tax at an inappropriate rate on the supply of goods or services on or after 1 May 2025, for example by levying output tax at the standard rate of 15.5% on supplies that should have been subject to a standard rate of 15% or by zero-rating items that should not have been zero-rated. This article considers the potential VAT consequences for the supplying vendor as well as the customer where these errors occur.
In a media release, the Commissioner for SARS announced that vendors have until 15 May 2025 to amend their systems to account for VAT at the standard rate of 15% rather than 15.5% in respect of the supply or acquisition of goods or services. Evidently, if a supplying vendor is unable to amend its system to account for VAT at the standard rate of 15% from 1 May 2025, the output tax on some or all standard rated supplies made from 1 May 2025 until 15 May 2025 would be incorrectly levied at 15.5%. If this is the case, the Commissioner advised that, when completing the VAT 201 return, the output tax levied at the standard rate of 15.5% must be declared in field 12 (“Other and imported services”). Where output tax was levied at the standard rate of 15%, the vendor must declare the consideration for the supply of the goods or services (i.e. the VAT inclusive amount) in the applicable field as usual, namely field 1 (“Standard rate (excluding capital goods and/or services and accommodation”) field 1A (“Standard rate (only capital goods and/or services)”). The VAT 201 return will automatically calculate the output tax in respect of these supplies by applying the tax fraction of 15/115 to the consideration entered into field 1 and/or field 1A. Consequently, the output tax actually charged in respect of the supply of goods or services, whether levied at a standard rate 15% or 15.5%, must be declared and taken into account by the supplying vendor in determining the VAT payable or refundable for the VAT period.
From the customer’s perspective, the input tax claimable in respect of goods or services acquired that were subject to VAT at the standard rate of 15% must be declared on the VAT 201 return as usual by completing the input tax, calculated as 15% of the value of the supply, in the appropriate field on the VAT 201 return. However, if VAT was levied at a standard rate of 15.5% on the supply of the goods or services to such vendor, input tax calculated at 15.5% of the value of the supply must be completed as an adjustment in field 18 (“Other”) of the VAT 201 return. Therefore, the input tax actually incurred in respect of the acquisition of the goods or services, whether levied at a standard rate of 15% or 15.5%, must be claimed and taken into account in determining the VAT payable or refundable for the VAT period.
Of course, a supplying vendor has the option to rectify the position where output tax was wrongfully levied at a standard rate of 15.5% rather than 15% by issuing a credit note and refunding the customer for the additional VAT of 0.5% charged. Such a refund will trigger output tax in the hands of the customer if that customer is a vendor that was entitled to (and did in fact) claim input tax on the goods or services acquired. In completing the VAT 201 return, the vendor would, if an input tax deduction was claimed, have been required to claim the input tax claimable at 15.5% of the value of the supply in field 18 of the return. If that vendor is subsequently refunded for the additional 0.5% VAT charged, the customer must declare output tax, to the extent that an input tax deduction was initially claimed for the VAT so refunded, for that refund in field 12 of the VAT 201 return. On the other hand, the supplying vendor would be entitled to claim an input tax deduction for the VAT refunded, which should be disclosed in field 18 of the VAT 201 return. Importantly, the supplying vendor must be in possession of a valid credit note substantiating such input tax claim.
The Commissioner provided no guidance on the declaration of the supply of basic foodstuffs that were wrongfully zero-rated due to systems not being timeously updated to account for VAT at the standard rate on the supply of these products. In this regard, the Commissioner merely advised that vendors who have already updated their systems to zero-rate the additional basic foodstuffs that would have qualified for the zero-rating, are encouraged to reverse those changes before 1 May 2025. In the absence of specific guidance and considering the prevailing provisions of the Value-Added Tax Act (‘the VAT Act’), adverse implications may arise for the supplying vendor in this regard. The supplying vendor must account for output tax on the supply of these goods at the standard rate of 15% of the consideration for the supply of these goods as it did not qualify for zero-rating in terms of the VAT Act. If a vendor is required to levy output tax on a supply but fails to do so, the consideration charged for the supply is deemed to include VAT at the standard rate. If the supply was zero-rated, the price charged for the supply would not have been adjusted to include VAT at the standard rate of 15%, resulting in a loss to the vendor. Vendors are however allowed to issue credit notes to reverse the initial supply at the zero rate and reissue a tax invoice which includes the 15% VAT. Retailers would however find it difficult where most of these goods are sold at a point of sale and the recipients are not identifiable. On the other hand, the customer would, if that person is a vendor who acquired the goods for purposes of making taxable supplies, not be able to claim an input tax deduction. An input tax deduction may only be claimed if a vendor is in possession of a valid tax invoice. One of the requirements for a valid tax invoice is to contain either the following: 1) the value of the supply, the amount of VAT charged and the consideration for the supply or 2) the consideration for the supply together with either the amount of VAT charged or a statement that it includes a VAT charge along with the rate at which the VAT was charged. Evidently, if VAT was incorrectly levied at the zero rate on the supply of these goods, the tax invoice that was issued will include no VAT. In the case where the supplier issues a credit note and a new tax invoice with the VAT charged, the recipient vendor will be entitled to claim the VAT based on the standard requirements when claiming input tax.
Although this article focusses on the VAT-specific implications of the reversal of the VAT changes, one should also bear in mind that the VAT implications of a transaction may have a knock-on effect to the income tax consequences thereof. If a taxpayer is entitled to an income tax deduction in respect of the cost of goods or services acquired or if such amounts qualify as part of the base cost of an asset for capital gains tax purposes, the amount taken into account for income tax purposes must exclude the input tax to which the taxpayer is entitled. Similarly, the amount included in gross income in respect of the supply of goods or services, or taken into account as proceeds on the disposal of an asset for capital gains tax purposes, must exclude the output tax levied.
Clearly, the rapid implementation and withdrawal of changes in VAT provisions may result in some practical difficulties for vendors. Where uncertainty arises, we recommend consulting a reputable tax advisor.