A fair bit of uncertainty surrounding deposits and the VAT implications would be removed, had the concept been defined in the VAT Act separately. However, the definition of “consideration” in the VAT Act sets out the output tax implications of deposits.

The time of supply is important for VAT purposes as it determines when the vendor must account for VAT. Section 9(1) of the VAT Act sets out the general rule for time of supply as the earlier of the:

  • Time an invoice is issued or
  • Time any payment of consideration is received

According to the definition, a deposit (other than a deposit on a returnable container), whether refundable or not, given in respect of a supply of goods or services shall not be considered as payment made for the supply unless and until:

  • the supplier applies the deposit as consideration for the supply , or
  • the deposit is forfeited

Application of this definition can be illustrated using the following examples of taxable supplies.

  1. Rental agreements: a rental deposit received is not subject to VAT until applied against the costs of earning rent, or forfeited as rent.
  2. Contract work: A deposit received in advance for work to be done is not subject to VAT until applied in reduction of the contract consideration.

 

As soon as the deposit is used or applied or forfeited, it will be subject to VAT. Output VAT, at the rate of 14/114 of that portion of the deposit used or applied, will be payable to SARS.

The common scenarios after the receipt of a deposit for taxable supplies and the treatment thereof are as follows:

  • Goods are delivered or services completed and the client pays the remaining purchase price

This directly influences the time of supply in terms of Section 9 of the VAT Act.  When delivery is taken, the deposit together with the balance of the purchase price constitutes consideration as defined and Output tax must be levied on the supply.

  • The deposit is returned

No supply has taken place, and the deposit is not a consideration, therefore no Output tax liability exists.

  • The sale or service is cancelled and the deposit is forfeited

Any deposit payment retained (forfeited) by the vendor is regarded as consideration and Output tax should be accounted for.

When a payment is received, as opposed to a deposit, then VAT is immediately payable on the full purchase price. This is because payment of an account immediately triggers time of supply rule and VAT is payable whether or not an invoice has been issued.

In conclusion it must be noted that a “deposit” received that does not form part of the payment due (that is consideration payable) for a supply, will not trigger the time of supply, unless and until, it is applied as payment against the consideration.

Jaishree Perumal

Trainee Accountant, Durban

Also read: Should a non-executive director register for VAT?