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Financial services: Be wary of the Vat consequences of fee-sharing arrangements

by , 13 January 2014
Financial services are normally Vat-exempt. But some of the related fees are still charged Vat. Read on as we show you the Vat consequences of fee-sharing arrangements and how to treat these fees correctly so you can avoid penalties and interest charges.

The Vat Act makes certain financial services exempt from Vat. These don't form part of a vendor's business for Vat purposes.

What about fee-sharing arrangements?

Let's first define fee-sharing arrangements…

The Practical Vat Loose Leaf Service defines fee-sharing arrangements as a situation when an administrator refers stock-broking services for its clients to a stockbroker. The stockbroker and administrator agree on a fee-sharing basis for this referral.

For example, a Pension Fund (the Fund) appoints a Fund Administrator for fund administration services. It also gets third parties to ensure effective Investment Portfolio management.

  • The Fund Administrator invoices the Fund R57 (Vat inclusive).
  • The Fund Administrator contracts with the Third Party Service Provider for general share monitoring services. Third Party Service Provider invoices the Fund Administrator R114 (Vat inclusive) for these services.
  • The Fund Administrator appoints a Stockbroker to manage the Fund's Investment Portfolio. The Stockbroker invoices the Fund R228 (Vat inclusive).
  • The Fund Administrator and Stockbroker agree that the Stockbroker will pay R114 (50% of its fee of R228) towards settling amounts the Fund Administrator owes Third Party Service Provider. The Stockbroker pays Third Party Service Provider R114.

So what are the Vat implications?

Financial services: Vat consequences of fee-sharing arrangements explained

We'll use the above example to explain the Vat implications of fee-sharing arrangements:

  • The Fund Administrator's administration service to the Fund is subject to Vat at 14%. As the Fund won't be making taxable supplies, it can't claim the Vat as an input tax deduction.
  • Third Party Service Provider's share monitoring to the Fund Administrator is subject to Vat at 14%. The Fund Administrator can claim the Vat as an input tax deduction as the expense is needed to make taxable supplies.
  • Because the Fund Administrator appointed the Stockbroker as agent on behalf of its principal, the service is given to the Fund for all legal and Vat purposes. The Stockbroker's services are subject to Vat at 14%. The Fund won't be making taxable supplies so it can't claim the Vat as an input tax deduction.
  • Because the Stockbroker must settle a portion of the Fund Administrator's debt, the Stockbroker is for the Fund Administrator's benefit. The payment will be for letting Stockbroker manage the Fund's Investment Portfolio.
  • Essentially, the Fund Administrator is effectively giving the Stockbroker a service. So the Fund Administrator must give the Stockbroker a tax invoice and charge Vat at 14%. The Stockbroker can claim the Vat as an input tax deduction as it makes taxable supplies. As this Vat is mainly from managing, the Stockbroker can make a full input tax deduction.

Knowing the Vat consequences of fee-sharing arrangements will help ensure you treat these fees correctly and avoid penalties and interest charges.

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