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News & Press: 2018 News Items

Value-added tax rate increase: residential dwellings

Saturday, 14 July 2018  
Posted by: Bert vd Heever
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During May and June we received several queries regarding the VAT increase and the rate applicable to dwellings started before the 1st April 2018.

Cliffe Dekker Hofmeyr Inc published published a short article on the VAT rate increase and construction contracts. In it they stated that where a construction contract, in which the construction price is stated, was concluded before 1 April 2018 for the construction of a new dwelling, the construction services would attract VAT at 14% irrespective of when the construction services are rendered or completed.

One of our members wrote:

"The attached article issued by Cliffe Dekker Hofmeyr refers

My queries relate to the two paragraphs headed “Construction contracts for new dwellings concluded before 1 April 2018”

  1. Where a contract for a new dwelling was concluded prior to 1 April 2018 but construction has not yet commenced (due to plan approval issues) would the VAT applicable to the contract be 14% or 15%?
  2.  Where a contract for a new dwelling was concluded in December last year and construction commenced on 1 March this year would the VAT applicable to the contract (which will only be completed in February 2019) remain at 14%?
  3.  Both the above examples are for luxury dwellings and the contracts were awarded after a tender process based on bills of quantities.  As the bills contain a number of Provisional Sums and PC Amounts which are still to be tendered would the subcontract tenders for the work included in these Prov. Sums and PC Amounts be subject to VAT at 14% or 15%?"

We asked Gerhard Badenhorst, Director - Tax & Exchange Control at Cliffe Dekker Hofmeyr Inc whether he would clarify his viewpoint in the article and he readily agreed to not only do that, but also allow us to publish his opinion on our website.

The full opinion is available here.

In summary, it states: "The VAT Act contains a specific concession for the sale of a dwelling by a vendor, the sale of vacant land on which a dwelling is to be erected by or on behalf of the purchaser, and the construction of a new dwelling by a vendor carrying on a construction enterprise, where a written agreement has been concluded for the sale or construction before 1 April 2018, in which the sale or construction price is determined and stipulated. Such supplies qualify for VAT at the rate of 14% where the written agreement for the sale or construction was concluded before 1 April 2018."

The following example attempts to clarify the situation:

Example: (Given that the Principal Contractor is a construction enterprise who has entered into an agreement to build a new dwelling at a certain determined price stipulated in an agreement concluded subject to 14% VAT prior to 1 April 2018)

Construction services performed before 1 April 2018:

Subcontractor/Suppliers price = R100 + R14 (14% VAT) = R114

Principal Contractors price = R100 (subcontractor/suppliers price before tax) + R100 (Principal contractors input and mark-up) = R200 + R28 (14% VAT) = R228

Principal Contractor’s VAT payment = R28 (Principal Contractors output tax)– R14 (Subcontractor/Suppliers input tax) = R14 net VAT payment

Therefore, the Principal Contractor retains R228 (Principal Contractors price) - R114 (Subcontractor/Suppliers price) – R14 (Principal Contractors net VAT payment) = R100

Construction services performed after 1 April 2018:

Subcontractor/Suppliers price = R100 + R15 (15% VAT) = R115

Principal Contractors price = R100 (subcontractor/suppliers price before tax) + R100 (Principal contractors input and mark-up) = R200 + R28 (14% VAT) = R228

Principal Contractor’s VAT payment = R28 (Principal Contractors output tax) – R15 (Subcontractor/Suppliers input tax) = R13 net VAT payment

Therefore, the Principal Contractor retains R228 (Principal Contractors price) - R115 (Subcontractor/Suppliers price) – R13 (Principal Contractors net VAT payment) = R100

We wish to thank Cliffe Dekker Hofmeyr Inc for their opinion and for their input in the above example.