Proposed VAT Amendments and the Cashflow Implications for South African Schools
Proposed VAT Amendments and the Cashflow Implications for South African Schools
By Kealeboga Mphahlele, Consultant
National Treasury has reaffirmed that its long-standing policy intent has been to exclude schools from the South African Value-Added Tax (VAT) net. In line with this intent, a proposed amendment to section 12 of the VAT Act provides that all goods or services supplied by a school registered under the South African Schools Act 84 of 1996 will be exempt from VAT. While this clarification brings certainty at policy level, it also introduces significant practical and financial consequences for schools, particularly those currently registered as VAT vendors.
Mandatory VAT Deregistration
Historically, some schools were able to register for VAT and claim input VAT where they made taxable supplies. Under the proposed amendment, all schools that are currently VAT registered will be required to deregister as VAT vendors from the effective date of the change, irrespective of whether they continue to carry on commercial activities (i.e., boarding, transport services, or rental of facilities).
Deemed Supply on deregistration
A key consequence of the deregistration is the deemed supply provision in section 8(2) of the VAT Act which states that any vendor that ceases to be registered for VAT is deemed to make a supply of all goods or rights forming part of the enterprise’s assets immediately before deregistration. The enterprise’s assets refer to all goods, property and rights that a vendor uses or has used in the course of conducting its enterprise activities. In the context of a school, the enterprise activity is understood to be the school’s activities that fell within the VAT net: for example, commercial rental of halls or sports fields, and any other taxable supplies.
As a result, ‘exit’ VAT becomes payable at the tax fraction (15/115) on the lower of the cost or open market value of those assets. Examples of these assets may include:
- Classrooms, hostels and administrative buildings
- Furniture, fittings, computer equipment, laboratory equipment and vehicles
- Stationery, textbooks held for resale and cleaning materials.
The rationale behind the deemed supply is to ensure that any input VAT previously claimed is effectively “recouped” by the fiscus when a vendor exits the VAT system. Schools must therefore confirm whether they were in fact entitled to and actually claimed the input tax on the relevant assets. For schools with significant fixed assets, this deemed output VAT could result in a substantial once-off VAT liability.
To provide relief, the amendment further proposes that the exit VAT liability may be paid in 12 equal instalments or so many monthly instalments as the Commissioner for SARS may allow.
The Apportionment Issue
An important issue arises in respect of input VAT apportionment, as some schools made a mix of taxable and exempt supplies and therefore applied an apportionment ratio to determine the extent of input VAT that could be claimed.
For example, where a school’s supplies were 90% exempt and 10% taxable and it constructed a new classroom block used for normal classes during the week and made available to third parties over the weekend for a fee, it would have claimed input VAT on only 10% of the cost of constructing or furnishing the classroom block. However, it does not appear that this apportionment is taken into account for the deemed supply. As a result, the school may now be liable to pay VAT on the full value of the classroom block, even though it was only used proportionately for taxable supplies.
In light of the failure of the amendments to take prior apportionment into account, schools that applied the apportionment ratio are now disadvantaged as the exit VAT will be payable on the full value of the asset even though the full input tax was not claimed. There appears to be no relief measure in place for assets that were only partially used for taxable supplies.
By contrast, schools that applied the direct attribution method, where the input tax was only claimed where costs were directly attributable to taxable supplies, are not affected in the same way as there is no mismatch between the input tax claimed and the deemed output tax arising on deregistration.
Financial and cash flow implications
Despite the concession granted to the taxpayer by the newly inserted section 8(2H) of the VAT Act to pay its VAT liability in 12 equal monthly installments or in so many installments as the Commissioner may allow, financial hardship and cashflow constraints for schools will result from the proposal. The schools will have to either absorb the financial loss arising from the additional VAT liability or will most likely have to recover the VAT liability in the form of higher school fees, since the income from the commercial activities would most likely represent only a small portion of the school’s total income. Hence, the school would most likely not be able to fully fund the VAT output by increasing charges for the commercial activities. It must be noted that schools will also experience higher ongoing costs relating to the commercial activities, as VAT incurred on goods and services acquired for commercial activities will become an expense. The higher costs may have to be recovered by the school by increasing the charges for those commercial activities- of course, subject to the charges remaining competitive.
Conclusion
While the proposed VAT amendment aligns the law with National Treasury’s stated policy intent of excluding schools from the VAT net, it carries significant financial and administrative implications. Deregistration, exit VAT, and the loss of input VAT claims will require careful planning, particularly for schools with mixed‑use activities. It will be crucial for schools to assess their exposure, model the cash‑flow impact and seek appropriate guidance to ensure a smooth transition out of the South African VAT system.
Should you require assistance with determining your VAT liability or applying to the Commissioner for extended payment periods, please reach out to us.