Page 441 - Juta's Indirect Tax

IN 57 VaLue-added tax act: InterPretatIOn nOtes IN 57
Interpretation Note 57
Sale of an enterprise or part thereof as a going concern
DATE: ACT: SECTIONS: SUBJECT:
Preamble
31 March 2010
VALUE-ADDED TAX ACT 89 OF 1991 (THE VAT ACT)
SECTIONS 8 (7), 8 (16), 11 (1) (e) AND 18A
SALE OF AN ENTERPRISE OR PART THEREOF AS A GOING CONCERN
In this Note legislative references to sections are to sections of the VAT Act unless otherwise stated.
1. Purpose
This Note serves to—
• set out the value-added tax (VAT) implications regarding the supply of an enterprise or part thereof as a going
concern;* and
• withdraw, in terms of section 5 (2), VAT Practice Note: No. 14 issued on 20 January 1995.
2. Background
The supply of an enterprise or of a part of an enterprise is a taxable supply which should be subject to VAT at the rate of 14%. However, provision is made in section 11 (1) (e) for the supply of an enterprise or part of an enterprise which is capable of separate operation to a registered vendor, to be subject to VAT at the rate of zero per cent. The requirements of section 11 (1) (e) are discussed in this Note.
3. The law
For ease of reference, the relevant sections of the VAT Act are quoted in the attached Annexure.
4. Application of the law
4.1 General
A vendor making a taxable supply of goods or services in the course or furtherance of its enterprise, is required in terms of section 7 (1) (a) to levy VAT at the standard rate on the supply.
The taxable supply of goods by a vendor includes the supply of its enterprise or a part thereof. This supply would be subject to VAT at the standard rate in terms of section 7 (1) (a), however, section 11 (1) (e) allows this supply to be zero-rated.
In order for the supply to qualify as being zero-rated in terms of section 11 (1) (e), the following requirements must be met:
• The seller and purchaser must be registered vendors.
• The supply must consist of an enterprise or part of an enterprise which is capable of separate operation.
• The parties must agree in writing that the supply is a going concern.
• The seller and purchaser must, at the conclusion of the agreement, agree in writing that the enterprise will be an
income-earning activity on the date of transfer thereof.
• The assets necessary for carrying on the enterprise must be disposed of to the purchaser.
• The parties must agree in writing that the consideration for the supply includes VAT at the zero rate.
A more detailed explanation of the aforementioned requirements is set out below.
4.2 The seller must be a vendor
Only a vendor can make a taxable supply of goods or services and charge VAT in terms of section 7 (1). Similarly, only a vendor can make a taxable supply of goods or services at the zero rate in terms of section 11. Accordingly, in order for a person to supply its enterprise as a going concern at the zero rate in terms of section 11 (1) (e), the seller must be a registered vendor.
A ‘vendor’ is de ned in section 1 to include a person who is registered or required to be registered as a vendor but has not applied for registration. In this regard, a ‘vendor’ being a compulsory registrant, is a person who carries on an enterprise and whose total value of taxable supplies exceeds or will exceed R1 000 000 in any 12-month period. A person will not be obliged to register as a vendor if the total value of its taxable supplies in a 12-month period will exceed the R1 000 000 limit merely as a result of, amongst others, the sale of its business.
4.3 The purchaser must be a registered vendor
The zero rate cannot apply if the recipient (purchaser) of the supply of an enterprise as a going concern is not a registered vendor. In order to comply with the provisions of section 11 (3), the seller must obtain and retain a copy of the purchaser’s Notice of Registration (form VAT 103). The vendor can furthermore verify that the VAT 103 is valid by using the VAT vendor search function, which is available on [the] SARS e ling website [http://www.sarse ling.co.za/ StaticMain.aspx].
In the event that the purchaser is not yet registered as a vendor at the time of concluding of the agreement, it is advisable that the agreement provide for the application of the zero rate, subject to the purchaser being a registered vendor with effect from the date the agreement is concluded, and to furnish a copy of the VAT 103 to the seller as soon as it is available. Should this not occur, the seller should ensure that the contract makes provision to increase the consideration payable to cater for the imposition of VAT at the rate of 14%.
* Any reference in this Note to an ‘enterprise’ disposed of as a going concern includes a reference to any separate part of an enterprise which is disposed of as a going concern.
Juta’s IndIrect tax 2016 433