Delivering simplicity from complexity VAT: Sale of Business Transactions Severus Smuts, September 2016
AGENDA The sale of a business Corporate Rollover VAT Relief section 8(25) Taxable supply of a going concern section 11(1)(e) VAT registrations Transaction costs Unincorporate Joint Ventures and Partnerships 2016. For information, contact Deloitte Touche Tohmatsu Limited Presentation title 3 [To edit, click View > Slide Master > Slide Master]
The sale of a business Member firms and DTTL: Insert appropriate copyright [To edit, click View > Slide Master > Slide Master] Presentation title [To edit, click View > Slide Master > Slide Master] 4
The sale of a business The sale of a business/enterprise (or part thereof capable of separate operation) attracts 14% VAT unless it qualifies for the VAT relief provided for in section 8(25) or is a zero rated supply in terms of section 11(1)(e) The sale of an enterprise as a going concern (or part thereof which is capable of separate operation) is deemed to be the supply of goods [section 8(7)] On the basis that the enterprise comprises a taxable activity the VAT levied by the Seller may be claimed by the Purchaser as input tax provided a valid tax invoice is issued. Payment of the purchase consideration must be made within 12 months to avoid having to re-pay the input VAT as output VAT, unless the sale contract provides that the payment is postponed to a later date in which case the 12-month period will be suspended until the amount becomes payable [section 22(3)] The time of supply will fall in a tax period in which an invoice is issued or any payment is received, whichever is earlier, unless the parties are connected persons in which case the supply will occur when the enterprise is made available to the recipient [section 9(1) and (2)] 5 2016 Deloitte Touche Tohmatsu Limited
Corporate rollover VAT relief Section 8(25) Member firms and DTTL: Insert appropriate copyright [To edit, click View > Slide Master > Slide Master] Presentation title [To edit, click View > Slide Master > Slide Master] 6
Corporate Rollover VAT Relief s 8(25) Provided certain requirements are met the supply of goods and services in terms of the Corporate Restructuring Rules in the Income Tax Act (ITA) is deemed not to be a taxable supply The relief does not apply to an intra-group or asset for asset transaction unless the supply comprises an enterprise (or part of an enterprise) capable of separate operation, where both supplier and recipient have agreed in writing that the enterprise (or part) is disposed of as a going concern Is the term going concern less restrictive as envisaged in section 11(1)(e) which also deals with going concern transactions? In addition, IN 57 deals with section 11(1)(e) only. For instance s8(25) does not refer to an income earning activity, but merely requires an enterprise to be disposed of as a going concern. However in terms of the Explanatory Memorandum: Effectively, the relief available under the reorganisation provisions is limited to going concern transfers (similar to the going concern rules of section 11(1)(e)). Result of the special dispensation, no supply for VAT purposes no requirement to disclose the transaction in field 3 on the VAT return 7 2016 Deloitte Touche Tohmatsu Limited
Corporate Rollover VAT Relief s 8(25) SARS Draft IN -Section 8(25) issued prior to the 2009 amendment The effect of a transaction which falls within section 8(25) is that the acquiring vendor effectively steps into the shoes of the supplying vendor. It follows that a change in use adjustment (section 18) may be required where there is an increase or decrease in taxable use of capital goods or services. The rationale for the insertion of section 8(25) into the VAT Act is to address the unintended VAT cost that arises where a partially taxable business is transferred. This implies that the adjustment normally required by the supplying vendor in terms of section 16(3)(h) as well as the output tax adjustment required to be made by the acquiring vendor, in terms of section 18A, will not be applicable. This Draft IN was never updated or issued by SARS 8 2016 Deloitte Touche Tohmatsu Limited
Corporate Rollover VAT Relief s 8(25) 2009 Amendment Explanatory Memorandum Pre 2009: no going concern requirement. Post 2009: proviso (i) and (ii) to section 8(25) introduced Result: The relief in section 8(25) will not apply when using section 42 or 45 of the ITA unless it is a going concern sale 9 2016 Deloitte Touche Tohmatsu Limited
Corporate Rollover VAT Relief s 8(25) Section 18(2) and (5): Change in use Notwithstanding the fact that supplies falling within section 8(25) of VAT Act do not require an adjustment contemplated in section 16(3)(h) or 18A, the provisions of section 18 remain applicable. In this regard, where the acquiring vendor applies the goods or services, which were acquired from the supplying vendor, for purposes other than that which the supplying vendor applied such goods or services, the relevant provisions of section 18 will apply In respect of capital assets where the reduction [s 18(2)] or increase [section 18(5)] in taxable use is more than 10% in respect of an asset in excess of R 40 000, a change in use adjustment will be required. 10 2016 Deloitte Touche Tohmatsu Limited
Corporate Rollover VAT Relief s 8(25) Transitional measures - Section 20(5A) and 21(8) Provides for a transitional period where tax invoices and debit and credit notes may be issued reflecting the name, address and VAT registration number of the vendor disposing of the enterprise Documentary requirements - Seller The sale agreement between the parties and a copy of the Recipient s VAT 103 Registration Certificate 11 2016 Deloitte Touche Tohmatsu Limited
Taxable supply of a going concern Member firms and DTTL: Insert appropriate copyright [To edit, click View > Slide Master > Slide Master] Presentation title [To edit, click View > Slide Master > Slide Master] 12
Supply of business as going concern s 11(1)(e) Section 11(1)(e), section 8(7), section 8(16), section 18A read with IN 57 The essentials of a going concern sale are: Sale must be to a registered vendor An enterprise or part of enterprise capable of separate operation must be supplied The assets necessary for carrying on of the enterprise must be disposed of to the purchaser The parties must agree in writing that - the enterprise is a going concern and that it will be an income earning activity on date of transfer the consideration for the supply is inclusive of VAT at zeropercent 13 2016 Deloitte Touche Tohmatsu Limited
Supply of business as going concern s 11(1)(e) Supply must be to a registered vendor Zero-rate cannot apply if the Purchaser is not yet registered recommended that the Seller obtains and retains a copy of the Purchaser s notice of registration (VAT103) Concession provided for in IN 57 that where Purchaser applied for registration prior to conclusion of agreement the zero rate will apply. Disposal of a going concern The concept of disposal can be interpreted to include an outright sale as well as a lease or rental or the making available of the assets necessary for the carrying of the enterprise which includes transferring a lease Property which is merely capable of being operated as a business does not constitute an income-earning activity as there must be current operation. An agreement to dispose of a business yet to commence or a dormant business is not a going concern 14 2016 Deloitte Touche Tohmatsu Limited
Supply of business as going concern s 11(1)(e) Agree in writing that the supply is a going concern Milner Street Properties-case (rectification of agreement): A tenanted property was sold. The agreement did not make provision that the property would be an income-earning activity qualifying for the zerorating of the property. The purchaser sought a tax invoice from the seller to claim the input tax and the tax invoice provided for VAT at 0%. The seller counterclaimed for an order to rectify the agreement that the sale of the property would be the sale of an enterprise as a going concern, which would be an income earning activity on date of transfer. The court held that the common intention of the parties was that the property would be sold at the zero-rate. The mistake was to record the understanding in writing in the agreement. Court upheld sellers counterclaim to rectify the agreement and dismissed purchaser s claim that the tax invoice reflect VAT at 14%. [Also see Strydom v Duvenhage where the court held the Seller liable to pay 14% VAT]) 15 2016 Deloitte Touche Tohmatsu Limited
Supply of business as going concern s 11(1)(e) Supply of an income earning activity The purchaser must be placed in possession of a business that can be operated in that same form, without any further action on the part of the purchaser It is not required that the purchaser in fact carries on that same activity after disposal the contract must merely create the capacity to continue Documentary requirements: IN 31 Requirements Copy of zero-rated tax invoice Sale of Business Agreement Copy of recipient s VAT 103 Registration Certificate 16 2016 Deloitte Touche Tohmatsu Limited
Supply of business as going concern s 11(1)(e) Time of supply The general time of supply rule applies the issue of an invoice or any payment, whichever is earlier. This is the time that determines in which tax period the disposal takes place and when a tax invoice must be issued. A tax invoice must be issued within 21 days after the time of supply has occurred. The disposal of a going concern may include different types of goods (e.g. fixed property) and services (e.g. trademarks, goodwill, debtors) however the supply is deemed to be an all inclusive supply of goods [section 8(7)]. Where the supply is between connected persons section 9(2) will apply, i.e. supply occurs when the goods are made available to the purchaser. One should also distinguish between the different dates: Signature date: When the parties conclude the agreement Effective date: Date agreed between the parties in the agreement which represents the date from when the purchaser will be entitled to the profits and exposed to the losses of the business Disposal/Closing date: when the business transfers to the purchaser (i.e. the sale is unconditional) this will generally be when the supply takes place 17 2016 Deloitte Touche Tohmatsu Limited
Supply of business as going concern s 11(1)(e) The parties may choose to cover the following aspects in the sale of business agreement: Each of the Seller and the Purchaser warrants that it is or will be registered when the supply takes place Should VAT at the standard rate for any reason be payable in respect of the goods or services supplied under this agreement, the purchase price shall increase by an amount equal to the VAT payable, and the Purchaser shall pay such VAT to the Seller against the delivery of a tax invoice that is compliant with section 20 of the VAT Act to the Purchaser. The Parties agree that the Seller will cease to be a vendor after the sale and that the provisions of section 20(5A) and Section 21 (8)of the VAT Act will be applicable for a period of six months after Closing Date to the effect that the Purchaser may issue or receive tax invoices and credit and debit notes that reflect the name, address and VAT registration number of the Seller. Where an enterprise is not acquired or the seller does not cease to carry on an enterprise the purchaser will not qualify for the above relief. In that case the Purchaser should consider appointing the Seller as its agent when issuing and receiving tax invoices and debit and credit notes on its behalf. 18 2016 Deloitte Touche Tohmatsu Limited
Where both s 8(25) and 11(1)(e) may apply to the supply In some cases the roll-over relief provisions are applied to only part of the sale i.e. certain goods/services are not transferred in terms of section 42 or 45 of the ITA ( excluded assets ) Where the goods or services supplied in terms of section 8(25) do not qualify as a going concern sale the entire transaction will be subject to VAT and may therefore qualify for zero rating provided the requirements in section 11(1)(e) are met It is therefore important to determine whether the goods and services supplied in terms of section 42 or 45 of the ITA (disregarding the excluded assets) meet the requirements of a going concern sale Where the goods or services supplied in terms of section 8(25) do qualify as a separate going concern sale the remaining goods or services will be subject to VAT in terms of section 7(1)(a) this appears to be an anomaly where an entire business is disposed of as a going concern 19 2016 Deloitte Touche Tohmatsu Limited
VAT registrations Member firms and DTTL: Insert appropriate copyright [To edit, click View > Slide Master > Slide Master] Presentation title [To edit, click View > Slide Master > Slide Master] 20
VAT Registrations Application for a VAT registration: An unsigned agreement will not be accepted The turnover of the business carried on by the Seller can be used to prove that the taxable supplies by the Purchaser will exceed R 50 000 SARS will not accept an application unless all the required documentation is provided (e.g. Appointment of Representative and opening of bank account) May use a group company s Bank account but must submit an indemnity (Form 119i) (a group structure generally required). Documentation older than 3 months not accepted Proof of residence/public Officer- problematic where more than one company in group uses same physical address additional documents required Proof of taxable supplies: signed agreement required together with amount of anticipated turnover and value of supplies in ZAR There seems to be inconsistency at SARS regarding the presence of the Tax Practitioner or Public Officer to add bank details 21 2016 Deloitte Touche Tohmatsu Limited
Transaction costs Member firms and DTTL: Insert appropriate copyright [To edit, click View > Slide Master > Slide Master] Presentation title [To edit, click View > Slide Master > Slide Master] 22
Transaction costs Corporate rollover VAT relief - s 8(25): Even though the transaction falls within section 8(25), the VAT incurred on goods or services acquired for the purposes of concluding such transactions should qualify as input tax where the transaction involves the acquisition/disposal of goods or services used in the course of making taxable supplies. The mere fact that the transactions are as a result of section 8(25) not being a supply for VAT purposes (that is, the supplier and recipient are deemed to be one person), does not prima facie indicate that the VAT incurred does not qualify as input tax as defined. It is submitted that the test as to whether input tax is deductible is to determine whether the supplying vendor and purchasing vendor would have been entitled to input tax had this transaction not fallen within the ambit of section 8(25). Going concerns under section 11(1)(e): Input tax claimable. 23 2016 Deloitte Touche Tohmatsu Limited
Transaction costs Corporate Activity ITC 1744 This judgement relied on the views expressed in a European case decided in 1994. Since then the question of the deductibility of VAT incurred on share issue costs has been considered in a number of judgments in the European Court of Justice (ECJ) and it was held that in certain circumstances input tax may be deducted. The facts: A company that was incorporated to exploit a patent to manufacture steel shipping containers sought to raise finance to commence its activities. It employed a specialist in the venture capital market to place its shares in the market. The company paid the specialist a placement fee equal to 20 per cent of the capital raised for the services provided. The specialist levied VAT on the supply of these services. The question before the court was whether the company was allowed to deduct the VAT on the placement fee paid to the specialist as input tax. The company contended that although issuing its shares is an exempt supply of a financial service, the connection between the issuing of shares to raise finance and its business of making taxable supplies (to manufacture and sell containers) was sufficiently close to justify the deductibility of input tax on the placement fee, i.e. the company would not have been able to manufacture and supply the containers in the absence of this service and the consequent failure to raise finance. 24 2016 Deloitte Touche Tohmatsu Limited
Transactions costs Corporate Activity The Court referred to the BLP case: BLP disposed of shares in order to finance general business debts. The ECJ ruled that a direct and immediate link was required between the professional fees paid in respect of the shares disposed of by BLP and its taxable transactions to be able to deduct input tax on the transactions. The court was of the opinion that there was a direct and immediate link between the professional fees incurred and the disposal (transfer) of shares, an exempt supply; and further that the ultimate purpose of the taxable person, in this case to raise funding to settle debts arising from taxable transactions, was not relevant when considering the deductibility of the input tax. In support of the "direct and immediate link" test, Conradie J referred to the UBAF Bank case where a company incurred fees for advisory services related to the acquisition of shares in three subsidiaries. The purpose of acquiring the subsidiaries was to strip the existing leasing businesses out of them to enable the taxpayer to expand its existing leasing business. In this case the judge concluded that there was a direct and immediate link between the fees incurred and the taxpayer's existing leasing business, and applied the "direct and immediate link" test in favour of the taxpayer. Relying on the "direct and immediate link" test the Court held that a direct and immediate link existed between the share issue costs and the issue of the shares that was not part of the taxpayer's business of manufacturing and selling containers, but rather an exempt supply 25 2016 Deloitte Touche Tohmatsu Limited
Transactions costs Corporate Activity The De Beers-case The issue before the court was whether it could be said that the services rendered to the vendor, DBCM, in relation to the restructuring of its shareholding could be said to have been acquired by it for the purpose of being consumed, used or supplied by it in the course of making taxable supplies? The court: It is difficult to see how the relevant services, both foreign and local, could be said to have been acquired by the vendor for such purpose unless it can be said that the vendor consumed or used those services for the purpose of making a taxable supply to its shareholders. [Emphasis added]. While it is accepted that VAT incurred in respect of general overhead and shareholders costs (audit, HR, legal, etc) incurred by a vendor in carrying on its enterprise fall within the ambit of the definition of "input tax", it is respectfully submitted that where, as here, the expenditure relates directly to a shareholder activity, the costs incurred cannot be said to relate to the making of any taxable supplies by the vendor in the course or furtherance of its mining "enterprise", that is, the expenditure does not relate to its "usual" enterprise activities (being the mining and sale of diamonds). 26 2016 Deloitte Touche Tohmatsu Limited
Transactions costs Corporate Activity It is evident from both the majority and minority judgment that expenditure relating to normal costs and overhead costs will be allowed as a deduction by the enterprise but that subsidiary costs will not be allowed as a deduction. 27 2016 Deloitte Touche Tohmatsu Limited
Unincorporate Joint Ventures Member firms and DTTL: Insert appropriate copyright [To edit, click View > Slide Master > Slide Master] Presentation title [To edit, click View > Slide Master > Slide Master] 28
Unincorporate Joint Ventures Where an unincorporate JV or partnership (UJV) carries on an enterprise separate from its members, transactions between and by the members create problems Although a UJV is regarded as a separate person for VAT purposes it is not recognised as such for income tax purposes. It follows that where transactions are concluded by the members (such as the sale of an interest in the UJV), it would be the member that would transact and not the UJV. To illustrate, Two connected persons, Company A and B, contributed assets to a UJV which conducts a separate enterprise for VAT purposes. Although A and B reflect a 50% interest in the UJV s assets in the Balance Sheet, it is the UJV that carries on an enterprise, not the members. In these circumstances it difficult to apply the VAT relief and it was proposed in the 2015 Budget tax proposals to extend the VAT relief to cover UJV s. 29 2016 Deloitte Touche Tohmatsu Limited
Unincorporate Joint Ventures ( UJV s) In the Draft IN in respect of s8(25) SARS previously advised that a ruling should be obtained where VAT relief is sought in respect of transactions concerning UJV s Where the UJV dissolves it would be important to transfer the enterprise/assets to the new owner before the enterprise ceases to avoid the application of s 8(2) of the VAT Act. It must be considered whether or not this transfer will constitute the supply of an enterprise as a going concern. 30 2016 Deloitte Touche Tohmatsu Limited
Disposal of a partnership interest It appears that there is often uncertainty whether the transfer of an interest in a partnership from one partner to another (i.e. either a new or existing partner) is a taxable supply The New Zealand Inland Revenue recently released a Tax Information Bulletin (Vol 26, No. 25, June 2014) (Bulletin) relating to this issue. The Bulletin confirms that most transfers of partnership interests will not be subject to Goods and Services Tax (GST) in New Zealand because the supply will generally not be made by a registered vendor or, if registered, the supply will not be made in the course or furtherance of that registered vendor s enterprise. Where the partner carries on an enterprise separate from the partnership transactions between the partner and the partnership attract VAT where goods or services are made available to the partnership the partner should levy 14% VAT. This will also allow the partner to claim full input tax deductions 31 2016 Deloitte Touche Tohmatsu Limited
Disposal of a partnership interest One issue which is not covered in the Bulletin is the GST/VAT consequences of a final dissolution of a partnership, including the dissolution of a partnership as a result of a partner acquiring the respective interests in the partnership from the other partners. The Bulletin s failure to deal with this issue may be an indication that there is some uncertainty on the correct GST/VAT treatment in these circumstances. Illustration: Consider a scenario where two partners, A and B, are equal partners in a partnership that is a registered VAT vendor. A acquires B s interest in the partnership and intends to carry on the business of the partnership in its own name. As a result of the transfer of the partnership interest from B to A, the partnership will cease to exist and therefore ceases to be a VAT vendor. It is submitted that the enterprise is transferred as a taxable supply from the partnership to A. It should therefore be possible to transfer the enterprise as a going concern provided the requirements in s 11(1)(e) are met 32 2016 Deloitte Touche Tohmatsu Limited