In a recent VAT case heard by the European Court of Justice, the taxpayer, Marks & Spencer, successfully claimed a refund of £3 500 000 (R52,5 million) from the United Kingdoms Commissioner of Customs and Excise after the organisation realised that the sale of its teacakes was subject to zero rate rather than the standard rate of VAT.
Although teacakes cannot be zero rated in terms of South African VAT legislation, this case illustrates that if a particular retailer or wholesaler incorrectly interprets the VAT treatment of small items, such as teacakes, the financial implications over a period of five years can be significant.
The VAT Act provides for the supply of certain so-called basic foodstuffs to be zero rated. The items covered, or rather, the items not covered by this zero rating are currently the topic of much debate with calls for extending the list of items.
The reasoning behind this zero rating is to provide basic foodstuffs at a reduced price to benefit the poor.
The list of zero rated items includes the following items:
brown bread
dried mealies
dried beans
lentils
pilchards or sardinella in tins or cans
rice
fresh fruit and vegetables
vegetable oil
milk
eggs
edible legumes.
However, the zero rating is not available where the goods are provided as a meal, ready for consumption when supplied. So, where a carton of milk is bought over the counter, the supply will be zero rated, but if bought as part of a meal, the supply becomes standard rated.
The list of zero rated items is, however, by no means easy to interpret and to apply. This is clear from SARS publications. Since 1991, SARS has published numerous general rulings and VAT news articles on zero rated foodstuffs, as well as a specific practice note on the zero rating of brown bread.
Some of the rulings include the following:
The supply of fresh paprika is zero rated, whereas dried paprika is standard rated
The supply of coriander is standard rated
Vegetable oil can be zero rated even if a colorant is added, but not if flavoring is added
Frozen potato chips that are blanched as part of the preservation process can still be supplied at the zero rate, but not if it contains an additive to make it darker
Brown bread must weigh more than 100 grams and the content of the dough must consist of at least 50% brown bread meal.
From all these publications it is possible to determine some basic guidelines, which can be used when deciding whether a product should be zero rated or not:
Determine if any standard rated goods, such as flavorings, were added to the products. If so, these products might not be zero rated.
Was a process involved other than for the purpose of preserving the product in its natural state? If not, it might not be zero rated.
If the product is supplied as a ready to eat meal, the zero rate cannot apply.
The other possibility is that a retailer may erroneously sell a product at the standard rate rather than the zero rate.
The result of this is that an informed customer might query why a retailer is selling basic foodstuff including VAT at 14%. Although not a direct financial loss to the retailer, such a transaction might result in a customer leaving with the idea that the retailer is more expensive than the competition.
In addition, if a retailer realises the mistake, the VAT incorrectly paid to SARS cannot be claimed back unless the retailer can provide proof to SARS that the VAT refund will be paid back to the customer who originally paid the VAT.
The issue of zero rated foodstuffs should be approached with caution. A possible way of minimizing the risk may be to form an industry Tax Forum where affected vendors can engage SARS to clarify VAT issues, such as the zero rating of certain foodstuffs.
This should result in consistency throughout the market and minimise any potential exposure resulting in errors in VAT treatment.
KPMG
VAT Act:2nd Schedule part B