CHAPTER FOUR OTHER TAXES
4.2 VALUE ADDED TAX (VAT)
registered on a two monthly return. Should one have taxable supplies in excess of R300 000 per year, it is compulsory to register for VAT.
This discussion will only concentrate on the applicable sections of the VAT Act that pertains to independent contractors. Before the effects of VAT on independent contractors is explained, it is necessary to look at some of the more important definitions in the VAT Act 89 of 1991, which are set out below.
"enterprise"
a) in the case of any vendor other than a local authority, any enterprise or activity which is carried on continuously or regularly by any person in the Republic or partly in the Republic and in the course or furtherance of which goods or services are supplied to any other person for a consideration, whether or not for profit, including any enterprise or activity carried on in the form of a commercial, financial, industrial, mining, fanning, fishing or professional concern or any other concern of a continuing nature or in the form of an association or club;
Provided that- iii)
aa) the rendering of services by an employee to his employer in the course of his employment or the rendering of services by the holder of any office in performing the duties of his office, shall not be deemed to be the carrying on of an enterprise to the extent that any amount constituting remuneration as contemplated in the definition of "remuneration" in paragraph 1 of the Fourth Schedule to the Income Tax Act is paid or is payable to such employee or office holder, as the case may be;
bb) subparagraph (aa) of this paragraph shall not apply in relation to any employment or office accepted by any person in carrying on any enterprise carried on by him independently of the employer or concern by whom the amount of remuneration is paid or payable;
The rendering of a service by an employee to an employer is, in terms of proviso (iii)(aa) of the definition of "enterprise" in section 1 of the Value Added Tax Act (the Act), deemed not to be the carrying on of an enterprise for VAT purposes if the amount paid to the employee for the services rendered constitutes "remuneration"
as defined in the Fourth Schedule of the Income Tax Act 58 of 1962.
This does not, in terms of proviso (iii)(bb) of the definition of "enterprise" in section 1 of the Act, apply in relation to any employment accepted by a person in carrying on an enterprise independently of the employer or concern paying the remuneration.
As per SARS issued Circular Minute 3/1999, amounts paid to independent traders do not form part of remuneration as defined and are therefore excluded from proviso (iii)(aa) of the definition of "enterprise" in section 1 of the VAT Act 89 of 1991.
The exclusion from remuneration in the case of an independent trader is valid unless the amount paid to the independent trader is deemed to be remuneration as envisaged by paragraph (ii)(aa) and (bb) of the definition of remuneration as defined. If either one or both of the requirements of paragraph (ii) (aa) and (bb) are met, the amount will constitute remuneration and PAYE will be recoverable.
The person receiving the deemed remuneration remains an independent trader and the person is carrying on an enterprise as defined in the Act.
There is therefore a situation where both VAT and PAYE is calculated on the same amount, i.e. where the exemption provided for by proviso (iii)(aa) to the definition of
"enterprise" in section 1 of the Act does not apply and where the independent trader is also subject to employees' tax.
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APPLYING THE SARS CIRCULAR MINUTE
VAT is payable on the supply of goods or services by a registered vendor in the course or furtherance of his enterprise. A person does not carry on an enterprise when he renders services in performing the duties of his office when remuneration as contemplated in paragraph 1 of the Fourth Schedule of the Income Tax Act 58 of 1962, is paid or payable to him. Therefore, remuneration which is normally subject to PAYE/SITE is not subject to VAT, and in general salaries, wages, allowances, bonuses, overtime pay, medical-aid and pension fund contributions will therefore not be subject to VAT.
Example: A directors' fee paid to a partnership, of which the director is a partner, does not attract VAT, as it constitutes remuneration as contemplated in the Fourth Schedule to the Income Tax Act 58 of 1962 and is not deemed to be the carrying on of an enterprise.
However VAT is payable in addition to PAYE when the services are rendered by e.g. an independent contractor as opposed to an employee, who is, or is required to be registered as a vendor in terms of proviso (iii)(bb) of the definition of an enterprise in section 1 of the VAT Act.
In summary VAT is not levied if the amount is considered to be remuneration as defined. However there could be a situation where an independent contractor who is registered for VAT and subject his services to VAT. As a result of the statutory provisions he will be deemed to be an employee because he is either subject to control and supervision or he receives regular payments. The payments that he receives will be subjected to PAYE as per the Interpretation Note 17. In this situation he pays both VAT and PAYE on the service that he renders.