TAX TALK: VAT On Second Hand Vehicles

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

Many people are confused about the VAT treatment when a second hand car is sold. There are many reasons for this but most importantly the second hand car dealer thinks he knows the rules and the general public knows too little about the rules.This is the ultimate recipe to get the VAT treatment on the sale of a vehicle wrong.There is a specific rule that prohibits you from claiming the VAT paid when buying a passenger vehicle which complicates matters when deciding whether to charge VAT when that same vehicle is sold.The VAT Act defines a passenger vehicle as any vehicle that is principally designed or adapted to transport nine or fewer seated people including the driver and specifically includes a double cab bakkie and motor cycles with an acquisition cost of more than N$110 750 excluding VAT.Ambulances are specifically excluded from this definition.One simple rule that will apply without fail is that if you are not VAT-registered you cannot charge VAT when you sell your vehicle.When you sell your vehicle (which cost you N$115 000 VAT or sales tax inclusive) you obviously want to recover as much of the money that you paid originally for it and therefore you may want to charge something more than N$100 000 but less than N$115 000 to ensure you can sell the vehicle.You should only be concerned about charging VAT when selling your vehicle if you are VAT-registered.On the assumption that you are VAT-registered, you need answers to the following questions.The first question you need answer is whether you purchased the vehicle before 27 November 2000 (the date VAT was introduced) or thereafter.Secondly, if you purchased the vehicle after 27 November 2000 you also need to determine whether you are selling a passenger vehicle or some other type of vehicle.Thirdly, you need to determine whether you were entitled to claim input tax paid on the vehicle when it was purchased.If you acquired the vehicle before 27 November 2000 and you are VAT-registered, you must charge VAT on the selling price of the vehicle irrespective of the type of the vehicle.It is not important to determine whether the vehicle you are selling is a passenger vehicle or not.The chances are fairly good that if you have sold a passenger vehicle after 27 November 2000 that was purchased before that date you have not charged VAT because your logic will tell you that there is no VAT on passenger vehicles.If you acquired the vehicle after 27 November 2000, it is a passenger vehicle and you were not allowed to claim the VAT paid on the acquisition cost of the vehicle, you dont charge VAT when selling the vehicle.Most VAT registered persons will be affected by this rule because only car dealers, car leasing enterprises, tour operators and short term insurance companies may claim input VAT on passenger vehicles purchased for their taxable activity.If the vehicle sold was acquired after 27 November 2000 and it is not a passenger vehicle, you must charge VAT when the vehicle is sold.Employers must be particularly careful when selling company owned vehicles to employees that were purchased before VAT was in place.Apart from the fringe benefit implication that may not be treated correctly, you can get the VAT treatment wrong and get yourself into further trouble with the Revenue Authorities.Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.There are many reasons for this but most importantly the second hand car dealer thinks he knows the rules and the general public knows too little about the rules.This is the ultimate recipe to get the VAT treatment on the sale of a vehicle wrong.There is a specific rule that prohibits you from claiming the VAT paid when buying a passenger vehicle which complicates matters when deciding whether to charge VAT when that same vehicle is sold.The VAT Act defines a passenger vehicle as any vehicle that is principally designed or adapted to transport nine or fewer seated people including the driver and specifically includes a double cab bakkie and motor cycles with an acquisition cost of more than N$110 750 excluding VAT.Ambulances are specifically excluded from this definition.One simple rule that will apply without fail is that if you are not VAT-registered you cannot charge VAT when you sell your vehicle.When you sell your vehicle (which cost you N$115 000 VAT or sales tax inclusive) you obviously want to recover as much of the money that you paid originally for it and therefore you may want to charge something more than N$100 000 but less than N$115 000 to ensure you can sell the vehicle.You should only be concerned about charging VAT when selling your vehicle if you are VAT-registered.On the assumption that you are VAT-registered, you need answers to the following questions.The first question you need answer is whether you purchased the vehicle before 27 November 2000 (the date VAT was introduced) or thereafter.Secondly, if you purchased the vehicle after 27 November 2000 you also need to determine whether you are selling a passenger vehicle or some other type of vehicle.Thirdly, you need to determine whether you were entitled to claim input tax paid on the vehicle when it was purchased.If you acquired the vehicle before 27 November 2000 and you are VAT-registered, you must charge VAT on the selling price of the vehicle irrespective of the type of the vehicle.It is not important to determine whether the vehicle you are selling is a passenger vehicle or not.The chances are fairly good that if you have sold a passenger vehicle after 27 November 2000 that was purchased before that date you have not charged VAT because your logic will tell you that there is no VAT on passenger vehicles.If you acquired the vehicle after 27 November 2000, it is a passenger vehicle and you were not allowed to claim the VAT paid on the acquisition cost of the vehicle, you dont charge VAT when selling the vehicle.Most VAT registered persons will be affected by this rule because only car dealers, car leasing enterprises, tour operators and short term insurance companies may claim input VAT on passenger vehicles purchased for their taxable activity.If the vehicle sold was acquired after 27 November 2000 and it is not a passenger vehicle, you must charge VAT when the vehicle is sold.Employers must be particularly careful when selling company owned vehicles to employees that were purchased before VAT was in place.Apart from the fringe benefit implication that may not be treated correctly, you can get the VAT treatment wrong and get yourself into further trouble with the Revenue Authorities.Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.