Sophia Brink, CA(SA), MCom Taxation, lecturer at the Department of Accounting of Stellenbosch University.
On 15 September 2010 SARS issued VAT ruling (074/2010) allowing employers who pay SAICA membership fees on behalf of its employee members to deduct the related input tax. This ruling was received based on an application from SAICA through its National Tax Committee.
Input tax is defined in paragraph (a)(i) of the definition of ‘input tax’ in section 1 of the Value-Added Tax Act of No. 89 of 1991 (the VAT Act) as “the tax charged under section 7 and payable in terms of that section by a supplier on the supply of goods or services made by that supplier to the vendor” to the extent that such goods or services are acquired by the vendor for the purpose of consumption use or supply in the course of making taxable supplies.
The VAT Act does not contain a definition of the term “supplies … made … to the vendor” as it appears in the definition of ‘input tax’. The issue has also not been ruled upon by the South African Tax Courts. The majority of foreign legal precedent seems to follow the principle that VAT follows the contractual agreements. Beneficiaries other than the contracting parties should be ignored in the enquiry as to whom a supply is made. If this principle is applied, SAICA would be making supplies to its members and the employer would not be entitled to recover VAT paid on the subscriptions. In an EU case of Mono Global Limited heard on 25 February 2004 the court deviated from the strict application of the contracting party principle and also considered the commercial beneficiary.
Applying the principle of the Mono Global case to employees’ SAICA membership fees, the following is applicable: In reality the commercial consumer of the benefit of the SAICA membership is the employer that pays the subscription fees. The CA’s skills and expertise are enhanced and maintained for the direct benefit of the employer, as is evident from the supposed better execution of his/her contractual obligations to the employer. SAICA therefore believes that a persuasive argument exists for the contention that the true consumer of the benefits of the membership is the employer of the CA. This is also in line with the overall scheme of the VAT Act that is aimed at taxing the final consumer of goods or services.
Section 17(2)(b) of the VAT Act determines that vendors may not deduct any amount of input tax in respect of fees or subscriptions paid in respect of membership of any club, association or society of a sporting, social or recreational nature. The VAT Guide for Vendors (VAT404) contains the following comments on the application of this prohibition:
“The VAT incurred on any fees or subscriptions to professional organizations may also be deducted to the extent that membership relates to taxable supplies made by the vendor. Examples of these professional organizations can be found in the financial services industry as well as the accounting, auditing, insurance and medical professions. Only if the employer has an obligation to bear the cost of the employee’s subscription to the professional organization in terms of an employment contract may the employer deduct the VAT incurred as input tax. This is also limited to the extent that the employer makes taxable supplies.”
SAICA requested the Commissioner’s confirmation that the practice set out in the VAT 404 also applies to individual membership, as in the case of SAICA members.
The following incongruity was highlighted by SAICA: If SAICA makes a taxable supply to a member, and the member is registered as a vendor for VAT purposes, the member will be entitled to deduct the VAT charged by SAICA as input tax to the extent that it is used or consumed in the course of making taxable supplies. In the instance where the supply is to an employee of a natural person or any entity other than a natural person, who is a vendor, the vendor will not be entitled to deduct input tax on the VAT charged on the supply to the employee even though the vendor bears the cost of the membership fees. This would however not be an appropriate result if the vendor has borne that cost wholly or partly for the purpose of making taxable supplies.
VAT ruling (074/2010)
SAICA was issued a VAT ruling in terms of section 72 of the VAT Act which allowed a vendor (being the employer of a SAICA member) to claim the VAT incurred by employees on SAICA membership fees as input tax. The VAT ruling was subject to the following terms and conditions:
- the supply by SAICA is subject to VAT in terms of section 7(1)(a);
- the vendor is required to pay the SAICA membership fees on behalf of the employee as it is a condition of employment that the employee is a member of SAICA;
- the services of the employee is used or consumed wholly for the purposes of making taxable supplies or, where the services of the employee is used or consumed by the vendor partly for such purpose, to the extent (as determined in accordance with the provisions of section 17) that the services of the employee is used or consumed for purposes of making taxable supplies;
- the vendor is in possession of an original tax invoice, issued by SAICA to the employee, at the time of submitting its VAT return;
- the employee is not a “vendor” as defined in section 1; and
- the VAT ruling is valid for a period of five years.
VAT ruling withdrawn
SARS advised the Tax Policy Unit of National Treasury of the VAT ruling and requested their consideration to amend the VAT Act in order to make provision for an employer of a SAICA member to deduct the VAT incurred by employees on SAICA membership fees as input tax to give effect to the VAT ruling and address the incongruity. After presenting the matter to the Tax Policy Unit of National Treasury it was concluded that SAICA membership fees are not acquired by the vendor (employer) and is therefore not a permissible deduction. The request to amend the VAT Act was accordingly denied. In view of this decision the ruling is withdrawn with effect from 1 January 2013. The VAT ruling will still be valid for membership fees charged in respect of the 2012 calendar year and claimed as input tax in or before the December 2012 tax period.
SAICA members already received 2013 annual subscription fee invoices during October 2012. Take note that even if these invoices are settled before December 2012 the input tax cannot be claimed by the employer because it relates to the 2013 calendar year.