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VAT and Fringe Benefits: When to Add Back, When To exclude

Friday, 30 July 2010   (0 Comments)
Posted by: Author: Vedika Andhee
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VAT and Fringe Benefits: When to Add Back, When To exclude

Whether or not the VAT is to be included in the value of an asset for fringe benefits tax purposes, depends on whether or not the employer claimed it as input tax up front

With the recent Draft Taxations Laws Amendment Bill being released and everyone being up in arms about SARS seeking to include VAT in the computation of the "determined value” of the company car, minds are already whirring about the implications of SARS adding back the VAT element and the possible repercussions in relation to other legislation.

SARS has argued that the "cost”of the company car to employers includes VAT at a rate of 14%, with no opportunity for the employer to recover this VAT.Accordingly, Treasury has proposed that the fringe benefit in relation to the use of the company car should then be based on the determined value which would be inclusive of VAT.This introduces an interesting topic for discussion—what exactly is meant by the words "cost thereof to the employer”?

Based on SARS’ rationale as stated above, the easiest point to start off with is the VAT element,as this is a factor that comes into play when considering the "cost”.Effectively, when legislation requires an employer to determine the fringe benefit based on the "cost thereof to the employer” (such as an acquisition of an asset less than market value) the actual cost should then be determined by excluding the relevant VAT amount from the computation (where the employer is able to claim the input VAT against any output VAT liability it may have on fringe benefits).

Let’s say that the employer buys the latest Google Phone for R9 000(inclusive of VAT) with the intention of awarding such phone to the employee who generated the most sales.Assuming that the employer would be able to claim the VAT, the fringe benefit should be calculated on the actual "cost to the employer” after taking the VAT element into account.This enables one to then effectively bring down the fringe benefit tax on the item—hooray for the employee! Caution however needs to be exercised in relation to items which can be regarded as entertainment for VAT purposes.

There are some companies out there who will say, "Of course we are already taking into consideration the VAT element and reducing the fringe benefit!” That's great—however, there are others who are probably unaware of this.For these employers, remember to exercise your minds, and where necessary inform the person or company processing the information through payroll to consider the VAT element when dealing with any fringe benefit legislation which requires one to look at the "cost thereof to the employer”.

VAT is a technical area, so employers should remember to consult with a specialist on order to determine the quantum of the VAT (if any) to be removed from the fringe benefit calculation.

Source: By Vedika Andhee (Tax breaks)



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