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Thread: VAT on future contracts

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    VAT on future contracts

    Has anyone the answer to the following dilemma. SARS does not seem to know either as they have not repied to my query of 2 weeks ago.

    The company concerned is a rental agent which arranges leases on residential properties. Up to now it has not been registered for VAT, but now the turnover dictates that it must register. The rental amounts are exempt from VAT but the commission is VATable. There are leases signed a year in advance and make no provision for VAT to be charged on the commission, as this was not required before registration.

    From registration, obviously new lease will have to include VAT, but what happens to the existing leases. Are these allowed to run their course as exempt of VAT, or does the agency have to "absorb" the VAT even though it has not charged the landlords VAT. It will not be possible to change the terms of the contract to include VAT as the landlords are mostly not VAT registered so they are not prepared to pay more than their contracted onbilgation.

    Any answers and if possible references would be gratefully received

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    Site Caretaker Dave A's Avatar
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    VAT is an "inclusive" tax - the price you see is the price you pay. So the rental agent is going to have to take the hit on existing contracts.

    Hopefully being able to claim input VAT will offset some of the pain.

    Escalating prices on renewal to cover the gap probably isn't going to be a bowl of roses either. Probably worth taking a close look at the clients to see if there are any registered VAT vendors in there - at least with those you'll be able to jump them for the VAT increase without hurting their pockets.

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    Just thinking out allowed here, for the yearly based agreements.

    What if invoices were generated for the contractual period at the time the contract was signed, and given to the client. This would then mean that the business/invoice was already concluded before you became a VAT vendor. The fact that they are paying you every month, is "the way you run your business". Any additional monthly expenses will then be a new invoice for the specific month, with VAT included.

    Any new contracts will have the VAT as part of the contract.
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    Thansk guys/ Dave, obviously not the naswer i had hoped for. Would the same apply if for example a big construction contract was under way during which time the contractor registered - he would then have to pick up the tab.

    Justloadit - a nice idea, but unfortunately that would mean that the R1m turnover ceiling would be reached sooner , as the annual turnover from a contrat would be shown in its month of origin which would necessitate earlier registration for VAT a sort of chicken and egg situation. In this situation it would mean the threshold would be long gone so we would now be laible for penalties for not registering !!

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    Site Caretaker Dave A's Avatar
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    Make no mistake, crossing the VAT threshold deserves planning, particularly in industries where the input VAT claims are going to be a pretty low percentage relative to output VAT.

    Back when my business approached the threshold, I actually held back on expansion for over a year to stay under the line and get all my ducks in a row. In my case it was going to mean about a 10% cut into my margin. So I wasn't prepared to go gently over the line - I ensured I was ready for some rapid growth to make sure what I would now be giving away to SARS was worth it and I'd still be making more money in my pocket.

    No sense growing if you aren't going to make more real profit at the end of the day.
    The trouble with opportunity is it normally comes dressed up as work.

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    Just to be sure the facts are right; this means that the commission has now reached the threshold, as opposed to rental?

    The leases are the underlying transaction that gives rise to the payment, that gives rise to the commission.

    In other words, the collection of the rent is the taxable supply and is therefore independent of the lease agreement. The lease agreement is in any event between the tenant and landlord.

    In my opinion the VAT should be added to the commission so recovered from the rent collected, because the tenant is not the customer, the landlord is.

    If this is likely the cause of strife, consider setting up another company as a second agency and split the lot into two. If it's a franchised outfit that could be a problem, but otherwise it might be a solution.

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    Thanks Clive

    Yes the commissions (from rentals and sales) have reached the threshold. The collection is the taxable supply, and he comm is paid by the landlord. The rental paid is exempt from VAT. However, I feel the comm is dependent on the lease, as the amount of comm is a percentage of the rental collected, and it is paid monthly upon collection of the renal from the tenants. The agent is in fact also a signing party to the lease, as there are some management responsibilities for the agent as well. For new leases it is clear to me that VAT must be added to the comm and charged to the landlord, but the question is what happens to the leases that are still running their course, and were signed before VAt registration and thus did not make provision for VAT.

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