VAT ruling to hit non-profits

Johannesburg - A recent tax court judgment where a not-for-profit organisation was denied a value added tax (VAT) claim could have far-reaching implications for welfare businesses and corporate social responsibility (CSR) programmes.

Christo Theron, director and head of tax at Grant Thornton, says that clarity on how the South African Revenue Service (Sars) intends applying this judgment is urgently required, as this ruling could hit the commitment of corporate South Africa to social upliftment projects.

The non-profit religious organisation in question distributes its message by way of free magazines. It claimed VAT back as it was incurred on the production, layout and printing of the magazine.

The basis of the claim was that underlying costs were incurred to make taxable supplies - that being the physical supply of the magazines. The claim was denied by Sars and on appeal, the assessment was confirmed by the tax court.

"Certain activities conducted by welfare organisations are specifically included in the concept of a VAT enterprise," says Theron.

"This means that non-profit associations can register as VAT vendors even if the total value of their taxable supplies is zero. In so doing, the concession allows these vendors to recover VAT incurred on goods and services consumed in the course of VAT-approved activities."

According to the VAT Act, taxable supplies are anything that a business supplies to a third person on which VAT must be charged (at 14% or 0%).

Yet, if one applies the above tax court judgment to donations made to needy beneficiaries - e.g. feeding schemes - it would mean that any free offerings made by a non-profit association, would not constitute a taxable supply.

"The result would be that such organisations will be unable to recover VAT incurred on services consumed in the making of such supplies," Theron says. "This clearly does not reflect the spirit of the VAT law dealing with welfare organisations."

In practice, it will also erode corporate South Africa's ability to contribute towards social upliftment projects, he says.

Many of these activities entail the making of free supplies to nominated beneficiaries. If these supplies of goods or services are made at no cost, VAT incurred in the procurement of goods consumed in the process of making such supplies, will not qualify as recoverable VAT.

"It is questionable whether Sars intended this outcome and uncertainty surrounding this case is definitely not conducive to tax administration by Sars or taxpayers."

Theron says Sars must provide clarity on this issue by way of an interpretation note or a legislative change.

- Fin24.com