Is proof of payment a requisite to an input tax claim?
It is trite in law that a vendor registered for value-added tax on the invoice basis is permitted to claim input tax, in the tax period in which supplies are made to him per the provisions of section 16(3) of the Value-Added Tax No. 89 of 1991 (“the VAT Act”). This provision then rightfully puzzles both vendors and tax practitioners alike who are noticing a common trend in which the South African Revenue Service (“SARS”) is disallowing input tax claims made by vendors on the grounds that payment, of the invoice to which the supplies relate, has not yet been made by the vendor.
When did payment become a pre-requisite to the input tax claim and does this nullify the very purpose of other provisions in legislation in relation thereto such as; the distinction between accounting bases under which vendors come on registry and provisions for anti-avoidance when payment has not yet been made?
We venture to answer the former not only based on our interpretation of the legislation, but also SARS’ position as stated in the “VAT 404 – Guide for Vendors (Issue 4)” (“the VAT Guide”). Never. The VAT Guide states this in so many words; “the full amount of input tax may be deducted on supplies received in the tax period, even where payment has not yet been made” (My emphasis). This position by SARS, in context, is in relation to the claiming of input tax by vendors registered under the invoice basis. Shocker!
Fine, SARS’ word is not law however odd it may be for the authority to seemingly go back on it, without any apparent catalyst. We therefore venture to briefly look at some provisions in law that are rendered null and void assuming there is any rationale to the new position SARS appears to be taking.
Furnishing VAT returns in accordance with the applicable accounting basis
Section 15 of the VAT Act provides for the basis under which a vendor may come under registration for VAT; namely, predominately, on the “invoice basis” or, in the alternative subject to the satisfaction of the Commissioner and certain requirements, on the “payment basis”. Under the provisions of section 16 of the VAT Act, the accounting basis under which a vendor is registered governs the manner in which the vendor furnishes their VAT returns.
In terms of subsection 3(b), a vendor registered for VAT under the payment basis may only claim input tax, in the tax period which payment has been made towards the consideration of supplies and to the extent such payment has been made.
This follows the presumed logic of the legislator on insertion of subsection 4(b) that, if the vendor is only to account for output vat to the extent payment has been received from the consumer, then input vat can only be claimed to the extent payment has been payment to a supplier, having one without the other results in a prejudice to the either the fiscus or the vendor.
Beyond the fact that the abovementioned subsection 3(b) would be redundant if payment was a pre-requisite to all input tax claims despite the applicable accounting basis as SARS’ latest additional assessments seem to suggest. The requirement for vendors, registered under the invoice basis, to calculate output tax on the invoices issued in a tax period, which SARS appears to be more than happy to accept, yet only claim the input tax once payment on supplies received has been effected would, in our opinion, be unjust. What is good for the goose should be good for the gander.
Good vendors gone bad
Section 22(3) of the VAT Act, subject to other provisions, provides that where a vendor, registered on the invoice basis, has made an input tax claim in a tax period and after a period of 12-months from such period has not made payment in relation to the supplies received by the vendor, the vendor is to reverse the input tax claim by way of making an output tax adjustment.
What constitutes payment when considering the application of the section is a matter the courts have considered in depth and a journey we do not seek to embark on for purposes of this article.
The recognition of an irrecoverable debt for accounting purposes is based on the accounting standard in use by a person. For VAT purposes, failure to pay a supplier within 12 months from the tax period in which you have claimed input tax on supplies received renders the claim bad and a reversal thereof. The underlying assumption, one would think, being that the vendor constitutes, at least for VAT purposes, a bad debtor for which the supplier is allowed to make the respective input tax adjustment necessary under section 22(1) of the VAT Act. Alas, this is not the case and, unfortunately, not the arguable injustice this article looks to focus on.
The purpose for this carve-out in law, given SARS’ current position, is then moot. Assuming payment is a requisite to the claiming of input tax for all vendors there is no purpose to make room for failure to pay in law. If not already glaringly obvious, it is worth noting that the section 22 of the VAT Act does not make provision for vendors registered under the payment basis to reverse input tax claims to the extent payment has not been made because … payment is a requisite to an input tax claim under such accounting basis.
Why, then, is SARS disallowing input tax claims on the basis that payment has not yet been made?
Only the deities that be and SARS know. In our recent experience, SARS is not faltering in this incomprehensible stance, which they seem to have chosen. Even upon offering the irrelevant proof of payment, it appears that not all proof of payment really constitutes proof of payment. Needless to say, you do not want to find yourself with a toy knife at a burden of proof fight and not having the necessary expertise to navigate this, dare I say, “obscene” battle with SARS may see you in a position where an entirely valid input tax claim is set aside.
