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FAQ - 16 September 2015

16 September 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Can I claim input VAT on vehicles such as club cabs and what proof will suffice?

Q:  My client promotes veterinary farming products for various companies on a commission basis. He also buys and sells dog food and sundry products. He is in the process of trading in his Toyota Hilux for another vehicle, and it seems that one can claim VAT on certain cabs?

With regard Interpretation note 82 (March 2015), will he be able to claim input VAT as long as the vehicle is used predominantly for business and it complies with the objective test of passenger versus loading area?

"Club cabs and extended cabs are generally used on public roads, have three or more wheels and are designed for carrying both passengers and goods. The objective test must therefore be applied to determine whether these vehicles are in fact constructed or converted wholly or mainly for the carriage of passengers.
In applying the objective test, one must determine which area measures more; the passenger area or the dedicated load area. The entire passenger cabin (enclosed passenger seating area excluding the engine and loading area), being the seating area is regarded as the area available to passengers.
It follows that if the passenger area measures more than the dedicated load area; the vehicle is designed mainly for the carriage of passengers and falls within the ambit of the definition of a "motor car”. Alternatively, if the dedicated load area of a motor vehicle is larger than the passenger area, the vehicle is constructed or converted mainly for carrying goods rather than passengers (that is, not a "motor car” as defined) and provided the vehicle is used for the purpose of making taxable supplies, a vendor will be entitled to an input tax deduction on acquisition of such vehicle”

What is the documentary proof that SARS needs when a VAT claim is made on such vehicles?

A:  We are not really sure what documents SARS would require if this is in dispute.  The motor manufacturer specifications may well be sufficient to meet the onus of proof with regard to the "constructed or converted wholly or mainly for the carriage of passengers double cab light delivery vehicle” requirement. 

A "double cab light delivery vehicle” would certainly not meet this requirement and is specifically listed in the definition (as being excluded).  In the SARS note that you referred to it is stated that "…vehicles that cast doubt as to whether they are designed for the carriage of passengers must be subjected to a test to determine whether they are designed wholly or mainly for the carriage of passengers. Vehicles with these characteristics include panel vans, club cabs, single cab light and heavy delivery vehicles.” 

The note continues to say that "the objective test requires a one dimensional measurement of the length of the area designed for the carriage of passengers in relation to the dedicated loading space in a vehicle. In applying the objective test, one must determine which area measures more in length; the passenger area or the dedicated loading space. The engine area should be disregarded for the purposes of this determination. If the passenger area measures more than the dedicated loading space, the vehicle is constructed mainly (that is, more than 50%) for the carriage of passengers and will thus constitute a "motor car” as defined.

The dedicated loading space is the area that is constructed solely for a purpose other than the carriage of passengers. There are vehicles constructed with an area within the vehicle that serves a dual purpose of providing both loading and passenger space (that is, fold-up seats that provide a loading area when folded up). Due to the fact that this area can be used to accommodate passengers, the entire area will be regarded as a space designed for the seating of passengers.

Vehicles such as club cabs, extended cabs and panel vans do not fall squarely within the first four categories listed in the definition of "motor car” and therefore the objective test must be applied to these vehicles in order to determine whether such vehicles fall within the last category. These vehicles must not be construed as an exhaustive list of vehicles that are subject to the objective test.  

2. What are the VAT implications when a client pays for goods with a fraudulent cheque?

Q:  An individual purchased goods via cheque at our retail store. When the cheque was deposited the funds were not released by the bank. We are debating whether this is bad debt or in fact theft. In the case of bad debt, SARS requires proof that sufficient energy was spent to obtain a bad debt before claiming the VAT.  I am, however, of the opinion that this is theft and should be handled as such.  The customer took the stock without paying for it.  I would therefore claim the VAT for the stock which is unpaid for.  Is this correct?

A:  We can’t comment on the legal nature of this, but don’t necessarily agree that this is a theft of trading stock.  From a Value-Added Tax point of view the principle is that there was a supply and consideration received.  A tax invoice was presumably also issued.  The fact that the recipient knew that the cheque was not going to be honoured doesn’t change that and the output tax accordingly had to be accounted for.  The same apply with respect to gross income. 

The return, by the bank of the cheque, creates a debt.  It may be easy for the taxpayer to prove that this amount cannot be recovered.  It may be difficult to trace the individual and demand payment / honouring of the cheque.  In the interim it may well be a doubtful debt. 

From a Value-added tax we also don’t believe that the vendor can issue a credit note – as the section 21(1) requirements will not be met.  Section 22(1) requires that the vendor "has written off so much of the said consideration as has become irrecoverable”. 

According to Juta VAT, the minimum requirements to satisfy the 'written off as irrecoverable debt' test may vary for different classes of taxpayer based on the differing nature and level of sophistication of the taxpayer's accounting records. 

The "as has become irrecoverable” refers to individually identifiable debts, which have become irrecoverable. Section 22 does not allow a deduction for doubtful debts. SARS regards a debt as irrecoverable if the vendor has complied with both the following requirements (see VAT NEWS 8 and Guide for Vendors (VAT 404) para 15.2):

  • the vendor must have done all the necessary entries in his accounting system to record that the amount has been written off, and
  • must have ceased any recovery action taken by himself and have decided to either not take any further action or have handed the debt over to an attorney or debt collector.'

Inland Revenue, New Zealand, has stated that whether a debt has become bad is an objective test. The question is whether a reasonably prudent business person would conclude that there is no reasonable likelihood that the debt will be paid. Factors which are likely to be relevant in this regard are the length of time a debt is outstanding, the efforts that the vendor has taken to collect the debt, information relating to the debtor's financial position and payment of other debts, which information is often gained through recovery action taken. They have also stated that it is not a requirement that recovery action be taken before a decision is made that a debt is bad. Further, a debt may be bad even though the vendor is taking action to recover the debt, as recovery action may be taken for a number of reasons, even when it is believed that there is no reasonable likelihood that the debt will be recovered (see Tax Information Bulletin Vol 12 No 5).

Disclaimer: Nothing in these queries and answers 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 answers, SAIT do not accept any responsibility for consequences of decisions taken based on these queries and answers. It remains your own responsibility to consult the relevant primary resources when taking a decision. 



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