In commercial transactions concluded by a party registered as a VAT vendor in the terms of the Value Added Tax Act, 1991 (the Act ), the vendor charges VAT at the standard rate of VAT (currently 15%) on goods or services provided by him in the course of his enterprise as a vendor.
Not all transactions concluded by a vendor attract liability for VAT. Some are exempt, such as rentals of residential property.
There is a third category in this context in which the seller vendor charges VAT but at the rate of zero percent.
The following are the elements of this type of transaction:
- Both the seller and the purchaser must be registered as vendors in terms of the Act.
- The subject matter of the sale must be an enterprise providing vatable goods or services which is fully functional and capable of separate operation at the time the agreement is concluded by the parties and the enterprise is taken over by the acquirer.
- All the assets necessary to conduct the enterprise as a separate business must form part of that disposal.
This type of transaction frequently involves the sale of a building that is let to a third party. Such a sale is referred to as the sale of a letting enterprise. In keeping with the definition of a zero rated transaction, the tenant and the purchaser cannot be the same party for the transaction to qualify for zero rating.
The advantage to a purchaser in transactions of this kind is that he is not faced with a cash flow downside. He doesn’t have to claim an input credit in respect of the VAT he would have had to pay if the sale had been standard rated.