Understanding VAT on fringe benefits 

FRINGE BENEFITS:

If you are a VAT vendor, Incentives to employees can be a stress if not treated with VAT caution

As a VAT vendor, any form of reward in any way has VAT implications for you as the employer and therefore very crucial to deal with it correctly to ensure your payroll is fully VAT – Compliant! Failure to do so SARS sharks will come for you and hold you accountable with penalties and interest from the first day you made a mistake –we don’t want any of that so let’s see how best to go about it.

As a VAT vendor you need to declare output tax to SARS on any fringe benefits you award your employees because you will have claimed VAT input on your holiday invoices. SARS will want a piece of that pie to compensate the VAT input.

WHAT EXACTLY IS A FRINGE BENEFIT?

An extra benefit supplementing an employee's salary, for example, a company car, subsidized meals, health insurance, etc. A perk a company gives to an employee for the performance of services.

• SO HOW IS VAT OUTPUT CALCULATED ON A FRINGE BENEFIT…?

Total amount the fringe benefit costed you * 14/114 (The VAT fraction) = VAT output you owe SARS.                  

HOW DO I KNOW WHICH FRINGE BENEFITS ATTRACT OUTPUT TAX?

There are eight (8) fringe benefits you must calculate output tax on:

• Rewarding employees for a great service
• You reward your top sales man, Neil, with an all paid expenses trip for him and his partner instead of a cash bonus.
• VAT output = Total cost of trip * 14/114
•                                  
• Good/Services given to relatives of employees
• You reward your employee who has met his targets over and above by paying for his children’s tuition fees for 3 years in university instead of a cash bonus.
• VAT output = Total cost of fees * 14/114
•  
• Purchase of an asset at less than actual value
• As your business is undergoing renovations and improvements, you allow your employee, Neil, to purchase the old furniture at a price less than what you would’ve sold in the market.
• VAT output = Total received for the furniture *14/114
•                          
• Right of use of asset
• Your company has a holiday house which you allow your employees to visit for holiday with family at a lessor cost.
• VAT output = Amount paid by the employee for the use of the house * 14/114
• Free meals and refreshments
• You buy lunch for your staff every day or sometimes.
• VAT output:  Total cost for lunch * 14/114
• Note: VAT input is denied for entertainment so this is a full VAT cost on the employer.
•                                                                                                                                         
• Free or cheap services
• You have a beauty store and you allow your employees to do treatments for free and sometimes retail products for free as well.
• VAT output: Total cost of the free treatments and products * 14/114
• Medical costs incurred by the employer
• You provide free medical tests and medication to staff.
• VAT output: Total cost of all medical benefits to employees * 14/114
•                                                                     
• Motor vehicles given as company cars
• This benefit has its own specific calculation:
• 1 thing to consider:

When you bought the car, was VAT input allowed or denied?

IF YES:

VAT output = Total cost of car * 0.6 * 14/114

IF NO:

VAT output = Total cost of the car * 0.3 * 14/114

REFERENCES: Bezuidenhout D & Franck P Practical VAT handbook (2017) F 03/001 – 010.