Deemed input VAT changes

In this series of articles, Cameron Kotze – the Tax Partner at Ernst and Young – discusses some topical tax issues for our readers.

THE 2007 Value-Added Tax Amendment Bill will amend the deemed input tax rules significantly once it becomes law. Section 18(1)(f) of the Value-Added Tax Act allowed a VAT-registered person to claim an amount equal to the tax fraction of any amount paid during a tax period (commonly referred to as deemed input VAT) to acquire used goods from any other person who at the time of acquisition was not entitled to claim input tax on the same goods subject to the person wishing to claim the deemed input being in possession of a signed receipt reflecting the details of the transaction.The rationale behind the principle of allowing a deemed input VAT claim is that the selling price contains an element VAT which should be eliminated so that the on supply of the same property does not attract VAT again.To illustrate this by example, where a registered person pays N$230 000 to acquire a used delivery van from a non-VAT registered person, the purchaser will be entitled to claim an amount of N$30 000 as deemed input VAT provided he or she is in possession of a signed receipt reflecting the seller’s name and address, the description of the delivery van purchased and the amount paid to acquire the vehicle.The amendment to section 18(1)(f) of the Value-Added tax Act is twofold – firstly, in future the deemed input VAT claim will be restricted to moveable property only (i.e.land and any improvements thereto will be excluded) and secondly, the moveable goods must be acquired in Namibia.The first change (restricting the deemed input VAT claim to moveable used goods only) seems to me to very punitive and disturbs one of the basic principles of VAT.The basic rule of VAT is that if a registered acquires any good or service in ordinary course of his or her business to sell a good or service, the input VAT should be claimable against the output VAT that charged on the sale of the good or service.So, if fixed property is acquired from a person who was not entitled to claim input tax at the time the property was acquired originally where the registered person operates his or her business from, the basic rule of VAT will allow the person to claim input VAT relating to the acquisition of the fixed property against the output VAT levied on sales of the business.This usually results in a significant tax refund in the period when the input VAT is claimed.The fixed property will however be used in the ordinary course of the person’s business to make VAT-taxable sales.The intended change in the law will prohibit a claim for input VAT in respect of the fixed property where the business is operated from but will continue to allow a deemed input VAT claim should a used delivery van be purchased.The distinction between the entitlement to a deemed input claim relating to moveable and immoveable property is technically incorrect and should be reconsidered.To illustrate my argument by example, consider the example where a land developer acquires land from a non-VAT-registered person and erects a commercial building for sale or for letting.Under the new rule, the land developer will be required to raise VAT on the selling price of the property or the rentals, but was denied input VAT relating to the acquisition of the land that is now sold or let.The second change puts it beyond all doubt that deemed input VAT claims will not be allowed where the used goods are acquired outside Namibia and imported into this country.This change makes sense because the seller would have acquired the goods outside Namibia and the Fiscus would never have received any VAT in respect of the goods that are acquired.The question to be answered here is whether this change is an acknowledgement by the legislator that a deemed input VAT was claimable in the past.I suspect only a court can give a binding answer to this question but it will be interesting to know why the change was really necessary.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.comSection 18(1)(f) of the Value-Added Tax Act allowed a VAT-registered person to claim an amount equal to the tax fraction of any amount paid during a tax period (commonly referred to as deemed input VAT) to acquire used goods from any other person who at the time of acquisition was not entitled to claim input tax on the same goods subject to the person wishing to claim the deemed input being in possession of a signed receipt reflecting the details of the transaction. The rationale behind the principle of allowing a deemed input VAT claim is that the selling price contains an element VAT which should be eliminated so that the on supply of the same property does not attract VAT again.To illustrate this by example, where a registered person pays N$230 000 to acquire a used delivery van from a non-VAT registered person, the purchaser will be entitled to claim an amount of N$30 000 as deemed input VAT provided he or she is in possession of a signed receipt reflecting the seller’s name and address, the description of the delivery van purchased and the amount paid to acquire the vehicle.The amendment to section 18(1)(f) of the Value-Added tax Act is twofold – firstly, in future the deemed input VAT claim will be restricted to moveable property only (i.e.land and any improvements thereto will be excluded) and secondly, the moveable goods must be acquired in Namibia.The first change (restricting the deemed input VAT claim to moveable used goods only) seems to me to very punitive and disturbs one of the basic principles of VAT.The basic rule of VAT is that if a registered acquires any good or service in ordinary course of his or her business to sell a good or service, the input VAT should be claimable against the output VAT that charged on the sale of the good or service. So, if fixed property is acquired from a person who was not entitled to claim input tax at the time the property was acquired originally where the registered person operates his or her business from, the basic rule of VAT will allow the person to claim input VAT relating to the acquisition of the fixed property against the output VAT levied on sales of the business.This usually results in a significant tax refund in the period when the input VAT is claimed.The fixed property will however be used in the ordinary course of the person’s business to make VAT-taxable sales.The intended change in the law will prohibit a claim for input VAT in respect of the fixed property where the business is operated from but will continue to allow a deemed input VAT claim should a used delivery van be purchased.The distinction between the entitlement to a deemed input claim relating to moveable and immoveable property is technically incorrect and should be reconsidered. To illustrate my argument by example, consider the example where a land developer acquires land from a non-VAT-registered person and erects a commercial building for sale or for letting.Under the new rule, the land developer will be required to raise VAT on the selling price of the property or the rentals, but was denied input VAT relating to the acquisition of the land that is now sold or let.The second change puts it beyond all doubt that deemed input VAT claims will not be allowed where the used goods are acquired outside Namibia and imported into this country.This change makes sense because the seller would have acquired the goods outside Namibia and the Fiscus would never have received any VAT in respect of the goods that are acquired.The question to be answered here is whether this change is an acknowledgement by the legislator that a deemed input VAT was claimable in the past.I suspect only a court can give a binding answer to this question but it will be interesting to know why the change was really necessary.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com