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Must VAT be charged on the provision of sea freight services?

Thursday, 19 March 2015   (0 Comments)
Posted by: Author: SAIT Technical
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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 that service. 

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 all.” 

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.



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