Value-added tax
627. VAT on deposits received
October 1998

 

 

In terms of the definition of "consideration" in the VAT Act, it is stated that a deposit (other than a deposit on a returnable container), whether refundable or not, given in respect of a supply of goods or services shall not be considered as payment made for the supply unless and until -

  • the supplier applies the deposit as consideration for the supply, or

  • the deposit is forfeited.

 

This definition has a number of implications:

  • Rent deposits received arc not subject to VAT until applied against the cost of repairs or forfeited as rent etc.

  • The deposit received does not have to be kept in a separate (trust) account so as not to be subject to VAT.

  • As soon as the deposit is used or applied or forfeited, it will be subject to VAT and output VAT, at the rate of 14/114 of that portion of the deposit used or applied, will be payable.

  • Deposits received in advance for work to be done are not subject to VAT until applied in reduction of the contract consideration.

 

This is extremely important.

 

If the payment received is simply a payment on account, as opposed to a deposit, then VAT is immediately payable on the full purchase price of goods sold and not only on the amount of the payment received. This is because a payment on account of a purchase price immediately triggers the time of supply rule and VAT is payable whether an invoice has been issued or not. If an invoice has been issued, the VAT is in any event payable. Payments not actually received by the vendor (e.g. held in an attorneyÙs trust account) would not be considered as payment received on account of the purchase price. The same would apply to retention amounts held back.

 

In regard to the supply of services on a progressive basis, e.g. a builder, the time of each supply is deemed to be the earliest of the following:

  • Payment for the supply becomes due

  • Payment is received

  • An invoice relating to the payment is issued

 

It is important to ensure in the case of progressive supplies that an invoice for the full contract price is not immediately issued, as VAT will then be payable immediately on the full contract price.

 

Horwath Zeller Karro

Definition "consideration" S1 VAT Act