It is an established principle that registered VAT vendors may claim a deduction for input tax on goods or services acquired for use in the course of making taxable supplies as part of carrying on an enterprise.[1] For example, a VAT vendor purchases trading stock from another vendor for the purpose of sale to its clients subsequently. Once those goods are purchased by the VAT vendor, even if on credit, input tax may generally be claimed on the goods purchased.
Where the VAT vendor above buys the goods on credit, the input tax claimed may effectively be reversed if payment to the creditor is not forthcoming timeously. In terms of section 22(3) of the VAT Act, where the consideration for the purchase of goods have not been paid by the VAT vendor to its supplier within 12 months of it buying the goods, a portion of the input tax claimed must be effectively reversed and paid over to SARS as output VAT. In other words, where a VAT vendor has claimed input tax, but has not yet settled the amount due to the person providing it with those goods or services in respect of which the input tax is claimed, the input tax claim will be effectively cancelled.
Although it may appear to be a trivial matter to most, the question does become relevant where goods or services are supplied between related persons or entities, such as group companies for instance. When “payment” is made for purposes of the VAT Act has recently been considered in the case of XYZ Company (Pty) Ltd v CSARS.[2] In that case a VAT supply was made between a holding company and its subsidiary, with the amount owing subsequently being moved from the debtors’ book to the loan account which the subsidiary company had in place with the holding company. SARS contended that the purchase price remaining outstanding on loan account has not yet been paid by the subsidiary, and therefore the input tax claimed by the subsidiary had to be accounted for as output tax after 12 months of the supply taking place.
The Tax Court however differed and attributed a wide meaning to the word “paid”. It held that the action of transferring the debt due from the debtors’ book to the loan account of the parties amounted to the payment of the debt arising from the supply. The holding company acquired a new right with new terms, being those linked to the newly created loan account and which differed from the trade debt, even though the counter-party was unchanged. Payment, in a wide sense, is not limited to cash flow only, but also include an exchange and creation of new rights and obligations.
While the judgment deals specifically with the context of section 22(3), a consideration whether amounts have been “paid” or not are not limited to this provision only and the effect thereof may extend wider to other provisions of the VAT Act too, the provisions of section 16(3) – which deal with input tax claimed on second hand goods acquired – being a pertinent example.
References:
[1] Section 17(1) of the VAT Act, 89 of 1991
[2] Case No.: VAT 1247, 5 September 2016 (Cape Town)
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