The dedicated email address that was available to deal specifically with questions on the amended electronic services rules, which came into effect from 1 April 2019, has now been closed as enquiries in this regard have reduced substantially. Guidance on this topic in the form of Frequently Asked Questions (FAQs) is still available on the SARS website.

In VAT Connect Issue 9 (February 2019) developments concerning electronic services were addressed. As part of this exercise, the FAQs on Supplies of Electronic Services was updated on 6 July 2019. Binding General Ruling (BGR) 51 “Cancellation of Registration of a Foreign Electronic Services Supplier” was issued, allowing foreign electronic services suppliers that will have taxable supplies of a value not exceeding R1 million in a 12-month period, to have their VAT registration cancelled. Applications for deregistration must be directed to eCommerceRegistration@sars.gov.za with the following details:

• Legal name of the entity.
  
  
• VAT registration number of the entity.
  
  
• The suggested date for the cancellation of registration to be effected.
  
  
• A declaration on a letterhead stating that the value of taxable supplies did not exceed the R1 million threshold in any consecutive period of 12 months.
  
  
• Financial records of the entity, certified by an accountant or auditor, confirming that the value of taxable supplies made in any consecutive 12-month period has not exceeded the R1 million threshold.

See VAT-ELEC-02-G02 – Foreign Suppliers of Electronic Services – External Guide for further information regarding the deregistration of foreign electronic services suppliers.
Any further enquiries relating to electronic services should be directed to the SARS contact centres. The SARS National Contact Centre operates weekdays between 8am and 5pm at 0800 00 7277 (0800 00 SARS). International callers can dial +27 11 602 2093 (operating between 8:00am and 4:00pm, SA time). Please ensure that a full description of the facts and circumstances is provided to SARS in order to properly consider the question.

There has recently been an increase in requests to SARS to make an arrangement or decision under section 72 to allow certain vendors to use the payments basis of accounting for VAT even though they do not meet the below requirements as set out in section 15. These requests mainly appear to be from vendors doing business with government entities, municipalities or state owned enterprises. While these vendors have invoiced their customers, they are usually not paid timeously resulting in cash flow problems in paying the VAT due to SARS.

Section 15 provides that a vendor must account for VAT on the invoice basis, unless SARS has granted the vendor approval to be on the payments basis (or cash basis) of accounting. The payments basis of accounting allows a vendor to account for VAT based on actual payments made and received in respect of taxable supplies during the tax period concerned.

Section 15 only allows the following categories of vendors to account for VAT on the payments basis:

• Public authorities and municipalities.
  
  
• Certain municipal entities that supply electricity, gas or water or refuse removal.
  
  
• Water boards and institutions that have powers similar to such boards listed in Part B of Schedule 3 to the Public Finance Management Act 1 of 1999.
  
  
• Associations not for gain.
  
  
• Electronic services suppliers.
  
  
• The South African Broadcasting Corporation Limited.
  
  
• Natural persons or unincorporated bodies of persons (of which all the members are natural persons), who have made taxable supplies not exceeding R2.5 million in the past 12 months and will not likely exceed R2.5 million in the next 12 months.

SARS may only allow a vendor to account for VAT on the payments basis if −

• a written application is made in that regard by the vendor; and
  
  
• the vendor concerned qualifies for the payments basis under the law.

SARS cannot act outside the law by allowing vendors to account for VAT on the payments basis if they do not meet the requirements as set out above. In addition, section 72 cannot be applied to resolve such matters. (See also the article “Decisions under section 72” below.)

Under section 17(1), a vendor that acquires goods or services partly for making taxable supplies and partly for non-taxable purposes (also referred to as mixed expenses) is only allowed to deduct input tax to the extent that the acquisition was for making taxable supplies. The deductible portion of input tax is calculated by using an apportionment method, approved by the Commissioner. The Commissioner has approved a standard turnover-based method as set out in BGR 16 “Standard Apportionment Method” to be used by all vendors that incur mixed expenses, unless that vendor has a ruling that sets out a pre-approved alternative method of apportionment.

A vendor that considers the method prescribed in BGR 16 not to be fair and reasonable or inappropriate in the circumstances must apply to SARS to use an alternative method. An objective test in determining the fairness, reasonability and appropriateness must be applied by both SARS and the vendor in arriving at a decision as to whether BGR 16 should apply in the circumstances.

An alternative method of apportionment cannot be approved retrospectively, except that it may apply from the beginning of the year of assessment during which the application was made. (See tax court judgement in case VAT 2063 delivered on 15 November 2019.) Therefore, whilst waiting for the outcome of any ruling application made in that regard, that vendor must continue to deduct input tax using the method in BGR 16.

A vendor that wants to use an alternative method of apportionment must apply using the existing VAT ruling application process, as per the VAT Rulings Process: Reference Guide.

In order to facilitate the smooth processing of a VAT ruling application to use an alternative method of apportionment, the following information should be included in the application:

• A complete description of all the business activities, including whether or not income was received from such activities.
   
• Details of specific transactions that may impact SARS’s decision-making process (for instance, where interest is earned from investment or lending activities, the interest rates applicable or alternatives to be used if necessary in specific circumstances).
  
  
• A list of all income streams, including the value thereof, and whether or not such income results from various business activities carried on by the business. Also indicate whether those income streams are treated as taxable, exempt or out-of-scope for VAT purposes.
  
  
• Any possible changes to the business activities or income streams in the past or near future that may have an impact on the apportionment ratio.
  
  
• Annual Financial Statements for the past three years.
  
  
• A list of all expenses (including the values thereof) that are –
  
  • directly attributed (i.e. being applied wholly) to the making of taxable supplies;
  • directly attributed (i.e. being applied wholly) to the making of exempt supplies or for other non-taxable purposes (including income received that does not result from a supply made);
  • subject to the requested apportionment method, i.e. mixed expenses.
    
    
• A detailed explanation as to why –
  
  • apportionment is required, i.e. why expenses are regarded as being for mixed purposes;
    
    
  • the standard turnover-based method in BGR 16 is considered not to be fair and reasonable in the circumstances, or why it is inappropriate;
    
    
  • the proposed alternative method or methods that are considered to be more fair and reasonable or appropriate taking into account the specific circumstances the enterprise.
    
    
• A clear indication as to the preferred apportionment method and a detailed analysis of every inclusion or exclusion in that method.
  
  
• The outcomes and analysis of at least two other apportionment methods considered (other than the one in BGR 16) or an explanation as to why any other methods of apportionment commonly used by vendors cannot be applied.
  
  
• Detailed calculations of the apportionment ratio for three consecutive years (from the latest information available) for the standard turnover-based method and the two alternative apportionment methods that have been considered. The calculation must clearly indicate how the numbers or values used in the calculations are determined.
  
  
• A statement in the ruling application as to whether input tax has been deducted in past tax periods using any method other than the one prescribed in BGR 16, and if so, from when that method was applied.
  
  
• A copy of any previous ruling issued within the past five years permitting the vendor to use an alternative method of apportionment.

It is important that all the information referred to above is submitted as part of an application to avoid unnecessary delays or the application not being accepted.

Since the last issue of VAT Connect, the following VAT documents have been published on the SARS website (See the “Legal Counsel” page):

Binding General Rulings (BGRs)

• BGR 49 “The Supply and Importation of Sanitary Towels (Pads)” – issued 15 March 2019
• BGR 51 “Cancellation of Registration of a Foreign Electronic Services Supplier” – issued 4 June 2019

Guides
• VAT 404 – Guide for Vendors – issued 12 December 2019