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Thread: ZERO Rated VAT

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    ZERO Rated VAT

    I have a quick question regarding ZERO rated VAT transactions.

    If a building is sold between 2 entities (both registered for VAT) with a lease agreement - going concern, the transaction is regarded to be Zero rated for VAT purposes.

    Does the above rule also apply if a Helicopter is sold between 2 entities (both registered for VAT), and with the lease agreement - going concern.

    Please assist.

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    From IN 57:

    Supply of an income-earning activity

    The contracting parties must, at the conclusion of the contract, agree in writing that the enterprise will be an income-earning activity on the date the ownership of the enterprise is transferred. This must be stated specifically in the agreement.

    The agreement must provide for the sale of an independent income-earning activity together with the necessary infrastructure. The purchaser must be placed in possession of a business which can be operated in that same form, without any further action on the part of the purchaser. The parties must, therefore, agree that the enterprise will remain active and operating until its transfer to new ownership. It is, however, not necessary that the purchaser indeed intends to carry on the particular activity of the enterprise. The contract must merely create a capacity to continue.

    It follows that the lease is the income earning activity (enterprise) and the chopper, the asset necessary for carrying on the enterprise.

    Also see par 4.9 of IN 57:

    The assets which are necessary for carrying on the enterprise must be disposed of by the seller to the purchaser. However, the assets that are not necessary for carrying on the enterprise, need not be disposed of with the enterprise. The seller can, for example, decide to keep certain assets or the purchaser can decide not to purchase certain old stock or book debts.

    The phrase ―disposed of, can be interpreted, within the context of section 11(1)(e), to include an outright sale as well as a lease or rental of the assets necessary for the carrying on of the enterprise. It is important to note that while the sale of the enterprise as a going concern can be a zero-rated supply, the lease or rental of the assets necessary for the carrying on of the enterprise will be a standard-rated supply. With regard to a lease or rental of the assets necessary for carrying on the enterprise, the purpose of entering into such lease or rental must be to give effect to, and not merely to purport, the supply of a business which is a going concern and an income-earning activity.

    Example 2 – Assets necessary for carrying on the enterprise

    Facts: Company A is a registered vendor and conducts a manufacturing activity. Company A leases a fixed property from Property Company B in which it conducts its manufacturing activity. Company A enters into an agreement with Company C to sell the manufacturing activity, which includes all the assets necessary for carrying on the enterprise. However, in terms of the agreement, Company A will terminate the lease for the fixed property with Property Company B. However, as the fixed property is an integral part of the activity conducted by Company A, in terms of the agreement, it requires Company C to enter into a simultaneous lease with Property Company B. Company C enters into a separate lease agreement with Property Company B for the lease of the fixed property that was previously leased by Company A.

    Question: Will the lease of the fixed property together with the sale of the manufacturing activity be regarded as the disposal of the assets which are necessary for carrying on the manufacturing activity?

    Result: The agreement of sale of the business read together with the lease agreement will constitute the disposal of assets which are necessary for carrying on the manufacturing activity. In instances where the building was not an integral part of the manufacturing activity of Company A (i.e. the business could still continue trading if relocated to a different venue), the sale agreement comprising only the sale of the business activity together with the assets necessary for carrying on the business, would satisfy the requirements of an income-earning activity.

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    QRS (12-Mar-12)

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