The rate of value added tax (VAT) on retention payments may be affected by the rate of VAT that was effective 1 April 2018.
Agreements within the construction industry often provide for retentions. These are amounts withheld by the recipient of the goods or services from the contract price until an agreed time when pre-determined operational levels or quality standards have been reached. In essence, retentions are used as a means of withholding part of the payment due until the construction work is delivered and functions as agreed. Retentions are normally payable after the lapse of a determined timeframe after final delivery or commissioning.
The VAT rules provide that the output tax on a retention payment will not be due at the time that the relevant milestone or installment is invoiced because the timing for the retention will be at the earliest of when the retention payment: (1) is invoiced; (2) becomes due or (3) is received.
Another point is that the VAT rate applicable to a retention payment will not necessarily be determined with reference to the VAT rate in force at the time that the vendor is liable for the output tax, e.g., when the retention payment is invoiced. The transitional provisions provide that the VAT rate to be applied to invoices issued after 1 April 2018 is the rate that was applicable at the time the: (1) goods were delivered; or (2) services were performed. Consequently, even if an invoice is issued in 2020, but it relates to goods delivered or services performed before 1 April 2018, that invoice is subject to 14% rate of VAT.
Systems of suppliers and recipients must be able to account for VAT at rates of 14% and 15% for the foreseeable future.
Read an April 2018 report [PDF 232 KB] prepared by the KPMG member firm in South Africa
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