Know when VAT is payable on property sales
It is very important to know when value-added tax (VAT) will be payable on property sales and how to properly make provision for it. Far too often this issue is overlooked or misapplied, and major disputes follow between the parties to the sale. Legal expert John Gilchrist explains why it is crucial to know and properly apply the information that follows to avoid compromising situations later that can have unfortunate implications for the estate agency that negotiated the contract.
VAT and residential property sales
Most agents know that VAT is not payable on residential rentals even if the landlord is a registered VAT vendor. It is only payable on business, industrial and other rentals where the property is not zoned for residential purposes or where a residential property is being used for business purposes. This tends, however, to create an impression that the sale of the property will also not attract VAT because it is purely a residential property being used for that purpose. All too often the question of whether VAT will be payable on a residential sale is overlooked and not provided for in the sale agreement.
In virtually every instance where the landlord is a company, close corporation or trust, and is registered as a VAT vendor, VAT will still be payable as the sale itself is regarded as a vatable transaction being conducted in the normal course of the landlord’s enterprise. If provision is not made for VAT, or the seller discovers later that the sale is automatically VAT inclusive with the seller being liable to pay it on transfer, the seller is likely to react negatively and complain that he would have constructed the sale differently if he had known that he was going to have to deduct the VAT from his sale proceeds.
The only certain instance where a VAT vendor will not be liable for VAT on the sale of a residential property is where the seller is a natural person and lives on the property as his primary residence. It can be extended to include renting it out to family members who are not paying any rental or to holiday homes which are not let out to the public while the owners are not occupying them. In these cases the transaction will not be regarded as part of the seller’s enterprise. It is crucially important for estate agents to get this right first-time and, when they are unsure of the situation, to contact a conveyancer for a definitive answer.
No mention of VAT liability in the sale agreement
Some years ago, a High Court decision established the principle that, if the sale contract makes no mention of who will be liable for the VAT on the purchase price, the contract is deemed to be VAT inclusive and the seller will be responsible for its payment. Even if the buyer agreed to pay the transfer duty on the sale or “all transfer costs”, the Court held that this does not include an agreement to pay the VAT if this should be payable instead of transfer duty. It also decreed that the transfer duty which the buyer agreed to pay cannot be used as a contribution towards the VAT payable.
In such cases where the VAT issue should have been dealt with in the sale agreement, agents may find themselves left with very irate sellers who find they are destined to lose 14% of their nett proceeds of the sale. They become even more annoyed when they find the buyer is going to escape any liability for VAT or transfer duty. Nonetheless no legal obligation rests on an agent to state whether an asking price is VAT inclusive or not. This applies to commercial rentals as well.
A recent High Court decision confirmed the seller’s exclusive responsibility for the VAT payable in such cases, even where the seller argued that the sale should have included the buyer’s agreement to pay it (which the buyer in any event denied) and that the sale agreement should be rectified by a Court Order to include the buyer’s responsibility to pay the VAT due. The Court did not have to decide this issue as the seller had not actually made an application to rectify the contract but commented that the application would not have succeeded in any event as the Court only has the right to make a contract conform to the true intention of the parties and may not amend or vary it in any way.
An interesting issue that arose in this case was whether the bondholder could make its consent to the sale subject to the condition that the buyer would pay the VAT. The sale in this case was a forced insolvency sale for which the bank’s consent was required, but the Court held that the bank had no right to vary or amend the terms of the original agreement which had already been finally determined between the parties. Estate agents are all too aware of cases where banks make their bond grants subject to such provisions (for example, where the buyer must first sell his own property, or some other new condition imposed on one of the parties) and it is important to know that the courts are likely to deny the right to new bondholders to effectively amend the sale contract by adding their own new terms and conditions to it.
Providing for payment of VAT by the buyer
When the buyer agrees to pay the VAT anyway because he too is a VAT vendor and can recover it afterwards, it is crucially important to handle this properly. In every case the contract must simply state what the purchase price is, adding the words “plus VAT” or “excluding VAT” to it (the two expressions mean the same thing). Sometimes the agency, even with the express agreement of the parties, adds the VAT to the real purchase price and makes the sale VAT inclusive. This is an extremely dangerous practice. If it later turns out that the sale is not VATable for any reason (for example, because SARS has unilaterally deregistered the seller as a VAT vendor because his business is dormant and no bi-monthly VAT payments are being made), the buyer will not legally be able to demand that the purchase price is reduced to what the original purchase price would have been. It also does not allow the buyer to reclaim the VAT as the seller alone is legally liable for it when the contract is deemed to be VAT inclusive. The buyer cannot claim that he actually paid the VAT himself.
Agents must make sure that the sale always defines the purchase price accurately (the actual consideration being paid for the property) and, where the buyer agrees to pay the VAT (if it is payable), by adding the words “plus VAT” or excluding VAT”. It is also important to state which party will pay the VAT if the sale is zero-rated in the contract and SARS legitimately refuses to allow this. In a recent sale another problem arose with a zero-rated transaction which SARS initially acknowledged. Some months after transfer had taken place SARS dipped into the seller’s bank account and extracted every cent in the account (around R180 000). SARS simultaneously informed the seller that the balance of the VAT (about another R250 000) was still due as SARS had reversed the original zero-rating. It turned out that the buyer had failed to make any bi-monthly VAT payments after the sale and SARS (quite legitimately) determined that the sale was no longer of a going concern and that zero-rating could no longer validly be claimed. All negotiators of property sales need to be very careful when dealing with VAT issues arising out of the sale.
Lastly, it is equally important, when stating that the buyer will pay the VAT due on the sale, to state exactly when it will be payable. The agreement should state a date before transfer or provide that the VAT will be payable as soon as the conveyancer requests it. Otherwise no date of payment will exist and the buyer may simply neglect or refuse to pay it before transfer. Even though the buyer agrees to pay it, the seller remains liable to SARS for the payment and will have to pay it himself if the buyer defaults. The buyer’s responsibility is purely to pay it to the seller – SARS will not come looking to the buyer for payment if the VAT is not timeously paid.