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Should output VAT be levied on the sale of a franchise?

15 January 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: A client of mine is a new franchisor and is in the process of selling his first franchise. Should he charge output vat on the sale of franchises? Please could you assist me on this query?

A: With regards to the query a franchise agreement was defined in U-drive Franchise Systems (Pty) Ltd v Drive Yourself (Pty) Ltd 1976 (1) SA 137 (D) at 141 as:

'those 'chain style'  C operations in which the owner of a national brand product or service sub-contracts to permit a local dealer or person to use his brand name and agrees to provide advertising and know-how services, equipment and other benefits to the franchisee for the purpose of running his business'. 

Such agreements therefore can entitle the purchasing franchisee to services or incorporeal goods. Section 7(1)(a) imposes VAT on all goods and services supplied by the vendor. "Services” in section 1 VAT Act include all things done or to be done.

The sale of franchises by a franchisor to franchisees in the furtherance on an enterprise would in our view constitute a taxable supply subject to VAT.

In SARS VAT News 13 (1999) it indicated that franchise fees would be subject to VAT. 

http://www.sars.gov.za/AllDocs/Documents/VATNews-Archive/LAPD-IntR-VATN-Arc-2013-13%20-%20VATNews%2013%20December%201999.pdf

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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