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VAT case law: Dealing with intercompany expenses and VAT

by , 22 February 2016
Many businesses have no idea how to declare intercompany expenses and the VAT.

And if you're one of those businesses, the chances are that SARS will hold you liable and penalise you.

So learn from the following VAT case in ensuring you handle intercompany expenses correctly for VAT purposes...

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VAT case #847

What were the facts of the case?

Mr. X owns four companies which all traded from the premises company A owns.
Company B, C and D all entered into lease agreements with company A, and company A issued tax invoices for all the rentals owing under the leases.

Company B paid its rent to A, but C and D didn't actually use the space.

They had no employees, didn't pay any rent and didn't claim the VAT shown on the tax invoices from company A.

SARS issued an assessment, despite no payment

SARS held that company A should've declared VAT on the rent due, but not paid, by C and D.

It issued an assessment for close to R1 million in penalties and over R200 000 in interest.

What happened next?

The vendor appealed, but the Tax Court dismissed it on the ground that when A issued the tax invoices, a supply took place, and it didn't matter if A enforced payment of the rentals or not.

It also stated that even though C and D didn't claim input tax, this didn't excuse A from declaring output tax on the rent.

What can you learn from this case?

There are 4 lessons you can learn from this case. They are:

1.       You must account for VAT as soon as supply takes place;

2.       Declare output tax on intercompany charges;

3.       Don't just ignore tax invoices; and

4.       Be careful how you treat intercompany expenses.

*To learn each of those points in more detail, get out your Practical VAT Loose Leaf Service handbook and page over to chapter I 15: Intercompany expenses and VAT: AT Case Law #847, or click here to order your copy today. 

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