In VAT Connect 6 (September 2017) we mentioned that Binding General Rulings 40 and 41 (the BGRs) were published to explain the VAT and employees’ tax treatment of directors’ fees earned by non-executive directors (NEDs). In addition, a Draft VAT Quick Reference Guide for NEDs was issued for public comment and FAQs were posted on the SARS website to provide further assistance to the public in this regard.

Emanating from the public comments, it became clear that there is generally some uncertainty as to how one would test if an individual should be regarded as an employee or an independent contractor in different situations. (See also Interpretation Note No.  17 – Employees’ Tax: Independent Contractors for further guidance on the test as to whether a person is an employee or independent contractor.)  Although the BGRs explain some generally applicable concepts that need to be taken into account in making that distinction, the focus of attention is to deal specifically with NEDs and the question as to whether they are liable to register and charge VAT on their services. The BGRs therefore clarified that NEDs are independent contractors when carrying on their functions and not employees. Consequently, an NED may be required to charge VAT on any services rendered if that person is registered or liable to register for VAT.

It follows, that the services rendered by any independent contractor in carrying out duties as a member of a commission of enquiry or serving on the board of a pension fund may attract VAT by applying exactly the same general principles explained in the BGRs.  However, no VAT will be payable if that member serving on the board, committee or commission of enquiry is found to be a common-law employee of the recipient of the services or if the value of taxable supplies made by that member is below the compulsory VAT registration threshold.

Should guidance be required about a transaction or aspect not covered in the Quick Reference Guide or the FAQs, you may apply for a VAT class ruling or a VAT ruling. Note, however, that the Commissioner will not rule on whether a person is an “employee” or an “independent contractor”, or whether an entity qualifies as a “company” as defined under the Companies Act.

BGR 46 – Supply of brown bread was issued on 27 November 2017 to clarify the scope of the zero-rating for brown bread that is dealt with in Item 1 of Part B of Schedule 2 to the VAT Act read with section 11(1)(j). BGR 46 goes into some of the background and history as to how the recent uncertainty arose with regard to the application of the zero-rating. It also provides an arrangement under section 72 to clarify that the following types of brown bread having a mass of more than 100g that are marketed and sold as bread (other than confectionery) continue to be zero-rated under section 11(1)(j):

• Whole-wheat brown bread
• High fibre brown bread
• High protein brown bread
• Brown health bread

BGR 46 applies from 1 April 2016 until 31 March 2018.

It may sometimes be necessary to provide a special arrangement, or to give direction to a vendor or class of vendors to overcome difficulties, anomalies or incongruities that have arisen or that may arise in regard to the application of any of the provisions of the VAT Act. This is provided for under section 72 and will usually be issued in the form of a VAT ruling. However, such an arrangement will only be granted in very exceptional circumstances and provided that certain specific requirements are met, namely –

• the Commissioner must be satisfied that there is a difficulty, anomaly or incongruity that exists that prevents a vendor or a class of vendors from complying with the provisions of the VAT Act; and
• the arrangement must not have the effect of substantially reducing or increasing the ultimate liability for tax levied under the VAT Act.

These requirements are strictly applied and any arrangement under section 72 may not be given if the effect is contrary to the construct and policy intent of the legislation as a whole, or will contradict any specific provision in the law. Typically, an arrangement may be appropriate where it is clear that there is a genuine shortcoming in the application of the VAT law and where an interim solution is sought by a vendor or class of vendors until it is possible to formally address the problem by, for example, amending the law.

Recently, it has been noted that requests for arrangements under section 72 have increased. Most of these requests have had to be rejected as they are sought purely to correct a vendor’s incorrect or erroneous application of the law, or to alleviate the vendor’s own internal administrative difficulties or lack of capacity. Common examples include the following:

• A request for SARS to condone the non-levying of VAT on taxable supplies made by the supplier where there has also been no deduction of input tax by the recipient;
• A request to backdate the application of a more favourable apportionment method despite the VAT law (section 17(1)) clearly stating that the method may only be changed with effect from –
  • a future tax period; or
  • another date that the Commissioner considers equitable that falls within the year of assessment during which the ruling application was made by the vendor.

Vendors are therefore requested to refrain from applying for an arrangement under section 72 if the reason for the request is that –

• you have merely not complied with the VAT law for past tax periods and seek relief in that regard;
• you want to improve your tax or financial position by attempting to have the law apply to you in a particular manner that provides a retrospective benefit applicable to past tax periods;
• you have internal administration or capacity issues or find it difficult to comply with your normal obligations as a vendor; or
• you disagree with the outcome of a ruling, assessment or other result of the proper application of the law.

It follows that if you have not complied with the law and a shortfall of tax has arisen, you should not attempt to resolve the issue by applying for an arrangement under section 72. In these circumstances, it would be best to disclose the non-compliance to your local SARS branch office and to request assistance in resolving the matter or to request for the remission of penalties under Part E of Chapter 15 of the Tax Administration Act, 2011 (the TA Act). Alternatively, you could apply for any relief that may be available under the Voluntary Disclosure Programme as provided for in Part B of Chapter 16 of the TA Act.

On 1 April 2015 the definition of “second-hand goods” was amended to deny the deduction of a notional input tax credit on the acquisition of gold and goods containing gold. The amendment was intended to address certain fraudulent practices among some traders in the second-hand gold market. As the denial of input tax in this regard had some unintended effects, including the negative impact on legitimate traders in second-hand gold, the definition of second-hand goods was amended again with effect from 1 April 2017 to limit the extent of the exclusion.

In order to clarify the effect of the latest amendment, BGR 43 – Deduction of input tax in respect of second-hand gold was issued on 12 September 2017. The BGR applies with effect from the date of the amendment, namely, 1 April 2017.

The circumstances under which a notional input tax is allowed or denied with reference to the amended definition of “second-hand goods”, as set out in BGR 43, may be summarised as follows:

• Goods consisting solely of gold [sub-paragraph (aa)]  – this sub-paragraph applies to certified 24-carat gold items (at least 99.5% pure gold) such as collectible local and foreign gold coins and minted gold ingots that are typically purchased by the general public for investment purposes. In these cases, a notional input tax credit may be allowed, for example, when a coin dealer buys collectible 24-carat gold coins from a person that is not a vendor, provided the goods concerned are acquired for resale in exactly the same state as they were acquired. If the items are intended to be used for manufacturing other products, or will be modified in any way before resale, then the exclusion will apply and no notional input tax deduction will be allowed.
• Gold coins issued by the SA Reserve Bank (SARB) [sub-paragraph (bb)] – this sub-paragraph refers to gold coins such as Krugerrands that are issued for circulation by the SARB and are of the type that are subject to VAT at the zero rate under section 11(1)(k). No notional input tax credit will be allowed to any vendor when acquiring these types of gold coins. There are no exceptions to this rule.
• Any other goods containing gold [sub-paragraph (cc)] – this sub-paragraph only applies if the gold or goods containing gold does not fall within the ambit of sub-paragraphs (aa) or (bb) explained above. This category includes gold items such as nine and 18-carat gold jewellery, certain gold coins and medallions that have a gold purity of less than 99.5%, or components found in, amongst others, computers, electronic and medical equipment that contain a certain amount of gold. A vendor will only be eligible to claim a notional input tax deduction in this category if the goods were acquired for resale by the business in the same state or substantially the same state in which they were acquired. This means that the principal characteristics of the gold or goods containing gold cannot be substantially altered or transformed. Unlike sub-paragraph (aa), in this category, minor modification to the goods can be tolerated without compromising the ability to deduct notional input tax on the acquisition. For example, if a jeweller buys an 18-carat second-hand gold ring from a non-vendor, that jeweller will be able to resize the ring and resell it without changing the characteristics of the ring. In that case, the vendor will still be able to claim a notional input tax credit on the acquisition. However, if that same jeweller bought the ring as scrap with a view to using it to make a gold bracelet, no notional input tax deduction will be allowed.

If you are a vendor and you trade in second-hand gold products, please ensure that you are clear about your intended use of any second-hand gold or goods containing gold at the time that you submit your return for the tax period in which you purchase the goods, as this will impact directly on your ability to claim a notional input tax deduction thereon.

Remember also that if you are a general dealer in second-hand goods (including any gold or goods containing gold), you must keep proper records of your second-hand purchases. Details of the transaction and the supplier must be completed in full on form VAT 264.  The form, proof of payment and a copy of the seller’s identification document must all be kept as part of your records to justify claiming a notional input tax deduction. Acceptable proof of identification in South Africa must include a photograph of the person and that person’s name and identity number, for example, the South African green bar-coded ID book, passport, valid temporary identity certificate or the new smartcard ID. Please also make sure that you complete form VAT 264 (which includes the declaration by the seller) each time that you purchase second-hand goods and not only when you get a new customer.

On 1 November 2017, BGR 45 – Supply of potatoes was issued to clarify the difference between potatoes that are supplied as seed for agricultural purposes and potatoes that are supplied as foodstuffs for human consumption. Although both types of supplies could qualify to be supplied at the zero rate, there are different conditions that need to be met. Potatoes supplied for agricultural purposes need to meet the requirements of section 11(1)(g) read with paragraph 2 of Part A of Schedule 2 and potatoes supplied for human consumption need to meet the requirements of section 11(1)(j) read with item 12 of paragraph 1 of Part B of Schedule 2.

The purpose of the BGR is therefore to highlight the different factors that need to be considered in determining whether the potatoes were supplied as seed or as foodstuffs. The reason for the BGR is that a number of vendors were found to be incorrectly supplying seed potatoes at the zero rate in situations where the prescribed conditions in paragraph 2 of Part A of Schedule 2 had not been met. For example, one of the conditions is that the purchaser of the seed potatoes must be a VAT-registered farmer. Therefore, the zero-rating under section 11(1)(g) will not apply if the purchaser is –

• a farmer, but not a VAT vendor; or
• an agricultural intermediary or seed wholesaler.

Furthermore, as the potatoes in the above cases are not supplied for human consumption, the zero-rating under section 11(1)(j) will not apply either. The result being that the supply of seed potatoes will be subject to VAT at the standard rate.

Some of the factors that the BGR identifies as being important include –

• the description of the potatoes on the tax invoice issued by the supplier;
• the status of the purchaser (whether that person is a VAT-registered farmer or not);
• the price and the labelling or packaging. (Seed potatoes are generally more expensive and must be supplied in specially labelled containers.)

The BGR applies with effect from 1 November 2017.

The Commissioner will only be satisfied that a person can get a separate VAT number in respect of any branch, division or separate enterprise carried on by that person if certain requirements are met. These conditions are mentioned, for example, in section 50 and in proviso (ii) to the definition of “enterprise” in section 1(1) with regard to local branches of local businesses and local branches of non-resident businesses.

The requirements are essentially that the local branch, division, separate enterprise or main business (as the case may be) must –

• be capable of being separately identified – especially with reference to the nature of the activities carried on, or the (physical) location of the business; and
• maintain an independent system of accounting in respect of the branch or main business.

It is normally quite clear as to whether a component of a particular business will meet the first requirement, but there has been some uncertainty with regard to the second requirement and what is meant by the term “independent system of accounting”. This term is interpreted to mean that the transactions and accounts of the separate business components must be separately identifiable with reference to the manner in which the accounting records are kept. It is not necessary for the separate business component to be running a totally separate accounting system altogether from the other business components or main business. Therefore all that is required is for the accounting system to be capable of generating separate financial statements for the business component concerned. This means that if one accounting system is run for all separately registered business components, then the system sub-accounts must be sufficiently maintained so that each separate business component can be separately identified and analysed for audit purposes.