Taxation Laws Amendment Bill 2025 - What will the VAT liability for schools be when they cease to be VAT vendors on 1 January 2026?
The 2025 draft amendment proposes to exempt from VAT all supplies made by a registered school. Virtually the same change was sought to be affected by amendments proposed in the 2024 TLAB. Following comments from industry, National Treasury (“NT”) and SARS communicated the following in the official Response Document[1]:
“Comment: More time is required to accurately assess the impact of a change in use, since this proposed amendment will trigger VAT consequences on such change in use. Further, ….
Response: Accepted. The amended has been withdrawn in order to consult further with all stakeholders.” [Emphasis added]
It is unclear whom “all” the stakeholders were that were consulted prior to the 2025 TLAB publication. One assumes that the impact of the so-called change-in-use adjustment must now have been assessed and communicated to the relevant stakeholders. Provision is made for the payment of the change in use adjustment over a period of 12 months, or over such a period as agreed to by SARS.
Section 8(2) of the VAT Act (2) determines that “For the purposes of this Act, where a person ceases to be a vendor, any goods (…) or right capable of assignment, cession or surrender which in either case then forms part of the assets of his enterprise, shall be deemed to be supplied by him in the course of his enterprise immediately before he ceased to be a vendor, …”:
Public schools operate on State land and theoretically, own no property in respect of which an exit VAT charge could be due, or a change-in-use adjustment required - or do they? Schools are legal personae in own right and are not an extension of the State. The right of use of school property is conferred upon schools by the Schools Act.
Private schools are often affiliated to churches and hold their rights of use in terms of rental agreements. Such rights of use would typically be indefinite and given the expansive campuses they occupy, could be of significant value.
Arguably, the rights in question would be subject to surrender, if not subject to assignment or cession. What would the present value be of an indefinite right of use of a school campus? Has SARS and NT provided the stakeholders with a formula to present-value the right in question to be able to budget for the VAT impact, or assurance that no exit VAT charge will apply?
Section 10 of the VAT Act determines that the value of supply of such right would be the lower of the cost of acquisition to the school of the right, or the market value. Where a school made an interest free loan to a third party to construct infrastructure used by the school, does the school have a cost of acquisition of the right of use, with a concomitant exit VAT liability? Would the making of substantial leasehold improvements in return for the right of use comprise an acquisition cost of the right of use? Or is the fact that the improvements were done on a voluntary basis sufficient to mean that the supply of such improvements was not a cost of acquiring the right of use? Should the consultation process not address these uncertainties and provide the schools with clarity on the potential consequences of the amendments, before they are implemented?
Private schools and private school groups hold billions of rand assets. The listed group Advtech’s financial statements reflect school property and equipment of R5.236 billion, for instance. This translates to an initial VAT liability of more than R600 million. This would potentially be ameliorated by certain clawbacks, but how is this budgeted for with such short notice? This is the more obvious liability, but has schools as tenants been alerted to the prospect of a potential change in use in respect of long leases or rights of use?
In terms of section 1 of the VAT Act a ““vendor” means any person who is or is required to be registered under this Act…”. A number of public schools are not registered for VAT despite substantially exceeding the VAT registration threshold in commercial, non-educational revenue. These vendors will also technically be liable for a VAT adjustment under section 8(2) of the VAT Act, should their rights of use qualify as an asset subject to the supply envisaged in section 8(2). The fact that universities will remain liable for VAT registration after the amendment confirms that schools (exceeding the VAT registration threshold) have a similar registration obligation, prior to the suggested amendment.
Section 8(2) deems a “vendor” to make a supply, irrespective of whether such vendor had availed itself of the available deductions in the past. There is no formula catered for, as in the other change in use provisions, which makes an allowance for deductions previously utilised.
One would expect that the relevant stakeholders would be alerted to the concomitant consequences of such a fundamental change in the law, unless SARS intends to apply the relevant provisions selectively.