In a recent VAT case heard by the European Court of Justice, the taxpayer, Marks & Spencer, successfully obtained a refund of £3 500 000 (R52,5 million) from the United Kingdom’s Commissioner of Customs and Excise after realizing that the sale of their teacakes was subject to zero rate VAT rather than the usual rate.
Although teacakes cannot be zero-rated under South African VAT rules, this case shows that if a merchant or wholesaler mistakenly interprets the VAT treatment of tiny items, such as teacakes, the financial repercussions over a five-year period can be significant.
The VAT Act makes it possible to zero-rate the supply of certain so-called basic foodstuffs. The products covered, or rather, the items not covered by this zero rating, are currently the subject of great dispute, with calls for the list of items to be expanded.
The rationale for this zero rating is to give basic goods at a low cost to the underprivileged.
The following items are in the list of zero-rated items:
rye bread
dried beans dry mealies
lentils
Tins or cans of pilchards or sardinella
rice
fruits and veggies
milk, eggs, and vegetable oil
legumes that are edible
However, where the commodities are offered as a meal, ready for consumption when supplied, the zero rating is not possible. So, if a carton of milk is purchased over the counter, the supply is zero rated; however, if purchased as part of a meal, the quantity becomes standard rated.
The list of zero-rated objects, on the other hand, is far from simple to read and implement. SARS publications make this abundantly evident. SARS has issued various general rulings and VAT news items on zero-rated goods since 1991, as well as a special practice note on the zero-rated status of brown bread.
Among the rulings are the following:
Fresh paprika is zero-rated, but dried paprika is standard-rated.
The coriander supply is standard.
Even if a colorant is applied, vegetable oil can be zero rated; nevertheless, flavoring cannot be zero rated.
Frozen potato chips that have been blanched as part of the preservation process can still be given at the zero rate, but not if they contain a darkening agent.
Brown bread must weigh more than 100 grams and contain at least 50% brown bread meal in the dough.
Fundamental principles
All of these articles can be utilized to develop some basic principles for determining whether a product should be zero rated or not:
Determine whether or not any standard-rated commodities, such as flavorings, were added to the products. If this is the case, these products may not be zero rated.
Was a process used that was not intended to preserve the product in its natural state? Otherwise, it might not be zero rated.
The zero rate cannot be applied if the product is offered as a ready-to-eat meal.
Standard rate instead of zero-rate
Another option is that a store will sell a product at the standard rate instead of the zero rate.
As a result, an informed client may wonder why a merchant sells basic foodstuffs with VAT at 14%. Although such a transaction does not result in a direct cash loss for the business, it may lead to a client departing with the impression that the retailer is more expensive than the competitors.
Furthermore, if a retailer discovers the error, the VAT mistakenly paid to SARS cannot be claimed back unless the store can provide SARS with confirmation that the VAT refund will be remitted back to the consumer who originally paid the VAT.
