Public Benefit Organisations could find themselves out of pocket if they neglect to correctly account for their Value Added Tax (VAT) when offering services or goods to a public entity.
A recent judgement by the Supreme Court of Appeal (SCA) gave clarity on when an organisation does not have to collect VAT on government’s behalf and when it should.
Victor Terblanche, MD at VATit, says the court confirmed that if an organisation receives a grant from a public entity to perform qualified welfare activities it is considered a “deemed supply” and not an “actual supply” in terms of the VAT Act.
The act provides for the zero rating (no VAT charge) of deemed supplies whereas actual supplies have a 14% VAT cost payable to the South African Revenue Service (Sars).
In the case before the SCA the Red Cross Trust Air Mercy Service Trust asked for a declaratory order on its interpretation of the act, which was that their services to the provincial health departments were zero-rated.
The Pretoria High Court confirmed the trust’s interpretation. Sars disagreed with the high court and appealed directly to the SCA.
The trust received payments from the provincial departments of health for the “rescue and caring of persons in distress” on behalf of the departments.
Terblanche, also chair of the South African Institute of Tax Professionals’ VAT committee, says it would have been a different case if the provincial governments gave the trust an annual grant to perform its humanitarian functions.
However, it rendered an actual service in terms of a procurement process which placed them in competition with commercial companies who could also have rendered the service.
The SCA said vendors making zero-rated supplies are usually owed refunds by Sars because they are allowed to claim their input tax on the supplies.
“There is no conceivable reason why, where public benefit organisations engage in commercial activities they should be treated differently from other commercial entities,” the judgment read.
Ferdie Schneider, head of tax at BDO, gives the example of government having to rebuild infrastructure at universities. It can either budget for the project, and offer it to the universities as a general grant to use as they see fit, or it can call for tenders and contracts with specific companies to do the work.
The services rendered in terms of the grant are considered deemed supplies and can be zero-rated, while the services rendered through the contract is actual services and should carry a 14% VAT charge, says Schneider.
Charles de Wet, PwC Africa head of indirect tax, says there is now no doubt that if an organisation is appointed and paid by the state to offer a service to it – even if it is a welfare organisation – it remains an “actual service”.
“Companies cannot disguise it as something different in an effort to avoid the VAT consequences. Once there is a direct link between the payment and the service, it cannot be a deemed service.”
Gerhard Badenhorst, tax executive at ENS who acted on behalf of the trust, says the dispute arose because of a lack of clarity in the act. It is for that reason that the high court initially found in favour of the trust.
However, the judgement now gives clarity on the interpretation of the VAT Act and courts will have to follow the judgement in future.
Badenhorst adds that if the trust was successful in its arguments that its service to government should have been zero-rated, it would have been beneficial to the provincial government.
“The service it received from the trust would have been 14% cheaper and this saving could have been used for additional service delivery.”
Terblanche notes that VAT legislation pertaining to welfare organisations is highly complex and difficult to navigate through.
“It places a heavy burden on them to apply the legislation correctly. It is a pity as welfare organisations ordinarily do not have the resources to appoint experts to assist them through the VAT minefields,” he says.
De Wet adds that it is important for welfare organisations to think about the nature of their income, and when they render services or goods to public entities they have to think carefully about the VAT treatment.