Must VAT be charged on the provision of sea freight services?
19 March 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: A client does
the arrangement of sea freight for clients here in SA. He submits his invoices
to the clients with VAT only on his admin fee and does not include VAT on the
sea freight charges. SARS has rejected his submissions and requires that these
amounts now be calculated in his VAT returns and included as income and output
tax to be calculated thereon.
A: Sea freight services
The information provided may not be sufficient for us to provide
the guidance required. We assume that
the sea freight services are supplied to your client’s clients. It is therefore not part of a "single supply”
by your client. In principle we assumed
that your client acts as an agent. We
also assumed that services are not "ancillary transport services” that may
qualify for the rate of zero per cent in terms of section 11(2)(d).
It is of great importance that this relationship be
correctly classified because in order to correctly apply the VAT legislation to
the concept of agents, it is necessary to identify and understand the concept
of an "agent” as understood in common law.
SARS’s VAT411 guide provides some additional guidance and we recommend
you refer to it.
The legal principles of an agent / principle relationship,
is basically that the principal should ultimately be responsible for the
commercial risks associated with a transaction, and that the agent is trading
for the principal's account. The agent is appointed by and takes instruction
from the principal regarding the facilitation of transactions as per the
principal's requirements and generally charges a fee or earns a commission for
An agency is a contract whereby one person (the agent) is
authorised and required by another person (the principal) to contract or to
negotiate a contract with a third person, on the latter's behalf. The agent in
representing the principal therefore provides a service to the principal, and
would normally charge a fee (generally referred to as "commission” or an
"agency fee”) but does not acquire ownership of the goods and/or services
supplied to or by the principal.
Section 54(2) then applies.
It provides that "where any vendor makes a taxable supply of goods or
services (in this instance the supply of the sea freight service) to an agent
who is acting on behalf of another person who is the principal for the purposes
of that supply, that supply shall be deemed to be made to that principal (your
client’s clients) and not to such agent (your client)”.
On that basis the client would then not have to account for
the see freight charges (both as output tax and also not input tax).
Judge Nugent explained it as follows in the Supreme Court of
Appeal case C:SARS v British Airways PLC:
"A further tax does not accrue when the vendor of another
service (British Airways) does no more than bring to account and recover the
charge that it was required to pay for the supply of that service by the
company (whether it is supplied to the passengers themselves, or to the airline
for the benefit of its passengers). The
moneys that are recovered by British Airways are not a consideration for the
supply by it of airport services simply because it does not supply them at
If your client was acting as a principal in his own right
and used the sea freight services in the making of the supply to his clients,
the position would be different. The
following comment (from the VAT411 is relevant in this regard):
"The agent will not alter the nature or value of the supplies
made between the principal and third parties.”
So for instance, if your client can change the value of the
supply it would be an indication that he was not acting as an agent.
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.