Indirect Tax
New approach to VAT apportionment at Universities By Farryl Singh
Recently, Higher Education South Africa (“HESA”), the industry body that represents the 23 Universities in South Africa, approached SARS to obtain an approved VAT apportionment ratio for the Universities. In response SARS has recently issued a VAT class ruling (the “ruling”) to the universities and technikons that applied as part of the class, confirming the new approved apportionment method to be used. The class ruling is valid for the period from 1 April 2012 to 31 December 2012.
The ruling is an interim measure providing additional time to SARS to fine tune the ruling and to provide further clarity on certain concepts by, for example, providing a dominant impression test to classify various research activities. Universities are also afforded the opportunity during this time to significantly amend their accounting systems to ensure that their income streams are correctly coded to take into account this new ruling. We do not expect the more permanent ruling to be significantly different.
The new ruling requires universities to distinguish between Research and General Overhead expenses. Accordingly, two different methods would be used to calculate the apportionment ratio for both.
Research Activities
When dealing with expenses incurred, the ruling requires the universities to distinguish between:
- Applied research
“Means a project which is primarily directed towards a specific practical aim or objective and should result in the application of new knowledge into a process or product or the transfer of existing knowledge into a new process or product, for the benefit of the donor or for the immediate purposes of commercialising the product”. - Basic Research
“Means an experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any particular application or use in view”. - Contract Research with student involvement
Not specifically defined. - Contract Research without student involvement
Not specifically defined.
SARS has provided predetermined apportionment percentages that will be allowed for research activities and these are as follows:
| Reseacrh Activity | Apportionment % |
| Applied Research | 50% |
| Basic Research | no vat claimable |
| Contract Research with student involvement | 50% |
| Contract Research without student involvement | 100% |
These percentages will also apply to capital assets purchased for research purposes. However, where the applicable percentage is not appropriate, for assets in excess of R1 million, the university must apply to SARS in writing requesting an alternative percentage/method.
General overhead expenditure
Previously, Universities made use of the varied input method to calculate their apportionment ratio. The varied input method calculates the apportionment ratio based on the percentage of supplies acquired for making exempt and non supplies of the total value of goods acquired for making exempt and taxable supplies.
The apportionment percentage for the General Overhead Expenditure for universities is to be calculated utilising the varied inputs method. This apportionment percentage is further limited to 12.5%, in addition, should on recalculation the percentage amount to less than 12.5%, the lesser percentage will apply.
Each university is further required to annually recalculate the percentage and within 3 months of the year end and make the necessary adjustments in its VAT returns.
Conclusion
Universities and technikons that are party to this class ruling will now be required to be far more proactive in managing their VAT inputs. In this regard it is recommended that:
- Universities document their decisions on how specific apportionment percentages were determined and allocated to projects.
- These institutions implement controls and procedures to ensure that once an apportionment percentage is allocated to a project, any changes to the percentage must be approved by the finance department. In this regard the “hard coding” of the accounting system should be considered whereby only authorised staff can change the VAT treatment.
