Tax Talk – Fringe benefits & VAT

In this series of articles, Cameron Kotz̩ Рthe Tax Partner at Ernst and Young Рdiscusses some topical tax issues for our readers.

OUR Value-added Tax Act (“the VAT Act”) specially exempts the supply of goods or services as a fringe benefit from value-added tax. So what does this mean for each of us? We have to pay income tax on the value of the fringe benefit anyway.For our employers it has a very important implication and it is likely that most employers have been treating this aspect of the VAT Act wrong.The VAT treatment of a fringe benefit is one of the exceptions to the general rule.If something is exempt from VAT, it means that the supplier of the good or service may not raise VAT on the selling price of the goods or services.So for example, if you rent a residential property, the landlord may not charge you VAT.The same applies to the supply of goods or services as a fringe benefit because it is specifically exempt from VAT.Your employer therefore does not raise VAT on the provision of a fringe benefit to you as employee.The VAT Act also prescribes the rules for claiming VAT paid to the supplier of the goods that are supplied to you as a fringe benefit.The rule can be appropriately described as the direct attribution method rule and simply put, if you acquire goods or services to make a supply that is exempt from VAT, you may not claim the VAT paid to the supplier as input VAT.So for example, if your employer gives you a gold watch as a long-service award, the VAT paid to acquire the watch cannot be claimed by the employer as input tax because no VAT may be charged when the watch is given to you because it is a fringe benefit.The VAT Act also provides some other rules relating to the claiming of VAT paid to suppliers of goods or services.The VAT paid to acquire a passenger vehicle (any vehicle designed or adapted to transport nine or fewer seated persons, including a double cab) may not be claimed as input tax unless you fall into one of the specific categories of business (such as a car dealer or car rental business).Furthermore, the VAT paid on any entertainment expenses can also not be claimed as input tax unless you conduct an entertainment enterprise or provide entertainment as part of your transport business.Entertainment is very widely defined in the VAT Act and includes the provision of food, beverages, tobacco, accommodation or recreation of any kind.Just about anything that has to do with enjoyment is included although in itself it may not always be enjoyed by us.The effect of the provisions of the VAT Act with regard to the provision of fringe benefits is as follows: * No VAT should be claimed when buying a passenger vehicle unless you are in the business of dealing in or the hiring of vehicles; * If you are in the business of dealing in or hiring of cars and you provide a vehicle to an employee as part of his remuneration package, no input VAT paid should be claimed in respect of the vehicle supplied to the employee as a fringe benefit; * The VAT paid on any expenditure incurred in respect of the vehicle provided to the employee (repair costs) may not be claimed in terms of the direct attribution method rules because the vehicle is provided to the employee as a fringe benefit; * No VAT should be claimed when incurring entertainment expenditure as defined unless you are an entertainment enterprise yourself or providing entertainment as part of your of transport business; and * No VAT should be claimed as input VAT in respect of any other good or service provided to an employee as a fringe benefit.Make sure you get it right – it is very easy to get it wrong and the consequences are not always very pleasant.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.So what does this mean for each of us? We have to pay income tax on the value of the fringe benefit anyway.For our employers it has a very important implication and it is likely that most employers have been treating this aspect of the VAT Act wrong.The VAT treatment of a fringe benefit is one of the exceptions to the general rule.If something is exempt from VAT, it means that the supplier of the good or service may not raise VAT on the selling price of the goods or services.So for example, if you rent a residential property, the landlord may not charge you VAT.The same applies to the supply of goods or services as a fringe benefit because it is specifically exempt from VAT.Your employer therefore does not raise VAT on the provision of a fringe benefit to you as employee.The VAT Act also prescribes the rules for claiming VAT paid to the supplier of the goods that are supplied to you as a fringe benefit.The rule can be appropriately described as the direct attribution method rule and simply put, if you acquire goods or services to make a supply that is exempt from VAT, you may not claim the VAT paid to the supplier as input VAT.So for example, if your employer gives you a gold watch as a long-service award, the VAT paid to acquire the watch cannot be claimed by the employer as input tax because no VAT may be charged when the watch is given to you because it is a fringe benefit.The VAT Act also provides some other rules relating to the claiming of VAT paid to suppliers of goods or services.The VAT paid to acquire a passenger vehicle (any vehicle designed or adapted to transport nine or fewer seated persons, including a double cab) may not be claimed as input tax unless you fall into one of the specific categories of business (such as a car dealer or car rental business). Furthermore, the VAT paid on any entertainment expenses can also not be claimed as input tax unless you conduct an entertainment enterprise or provide entertainment as part of your transport business.Entertainment is very widely defined in the VAT Act and includes the provision of food, beverages, tobacco, accommodation or recreation of any kind.Just about anything that has to do with enjoyment is included although in itself it may not always be enjoyed by us.The effect of the provisions of the VAT Act with regard to the provision of fringe benefits is as follows: * No VAT should be claimed when buying a passenger vehicle unless you are in the business of dealing in or the hiring of vehicles; * If you are in the business of dealing in or hiring of cars and you provide a vehicle to an employee as part of his remuneration package, no input VAT paid should be claimed in respect of the vehicle supplied to the employee as a fringe benefit; * The VAT paid on any expenditure incurred in respect of the vehicle provided to the employee (repair costs) may not be claimed in terms of the direct attribution method rules because the vehicle is provided to the employee as a fringe benefit; * No VAT should be claimed when incurring entertainment expenditure as defined unless you are an entertainment enterprise yourself or providing entertainment as part of your of transport business; and * No VAT should be claimed as input VAT in respect of any other good or service provided to an employee as a fringe benefit.Make sure you get it right – it is very easy to get it wrong and the consequences are not always very pleasant.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.