Employers endeavor to remunerate their employees to motivate them to work harder by giving them employment benefits in addition to cash pay. The benefits may include occupation of company house, right of use company motor vehicle, cellphone, security services, fuel coupons, school fees, passage benefit, medical cover, holiday allowance, entertainment, clothing allowance among others. Unknown to some employers is that when they are VAT registered and grant fringe benefits to their employees there are PAYE and VAT implications. The law defines a fringe benefit as an amount equal to the value of an advantage or benefit in respect of employment, service, office or other gainful occupation or in connection with the taking up or termination of employment. Fringes benefits are taxable in the eyes of the law. Under income tax, a benefit is part of earnings of an employee and hence it is subject to employee’s tax. The same benefits may have VAT implications and this what we unpack in this article.
Benefits subject to VAT
The VAT Act outlines the circumstances under which the provision of benefits in kind to employees must be characterized as constituting a taxable supply for a consideration. In this context, employee benefits in kind are defined as goods and services provided by employers to their employees in the framework of a contract of employment and/or under conditions that are not necessarily at arm’s length. It implies that when employers give fringe benefits to their employees, these are deemed to consist of a supply of goods or services and hence are viewed as a supply of goods or services made by a registered operator in the course of a trade carried on by him. Examples of supplies (fringe benefits) on which output tax must be accounted for include; the right of use by an employee of employer motor vehicle, the supply directly or in directly of security benefit, the cost of non-business local travel by air (air ticket for an employee a holiday or personal business) etc.
Excluded fringe benefits
VAT is inapplicable where a benefit has come about as a result of any supply of goods or services which is ordinarily exempt or zero-rated supply in terms of the VAT Act or a supply of entertainment. Additionally, if a benefit arises in the course of making exempt supplies by a person, namely supplies made by non VAT registered employers such as banks, insurance companies, registered educational institutions etc, no VAT is payable. For example a supply by any of these entities of a motor vehicle to an employee is not subject to VAT. The provision of a fringe benefit not constituting either goods or services is also not subject to VAT e.g. the granting of cash benefit. As a matter of emphasis, VAT on fringe benefits is collected only when an employer is registered for VAT, subject to exceptions stated above. The fringe benefits which are exempt in terms of the law include the supply of accommodation, the provision of free or subsidised loan, the supply of educational services, provision of fuel and fuel products other than gas, cost of travel by road or rail etc. Supplies which are deemed to be entertainment include the provision of canteen services, subscriptions for DSTV and subscriptions to golf clubs, free or subsidised meals, gym subscriptions etc. excluding professional subscriptions. Entertainment is defined in the VAT Act as “the provision of any food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind by a registered operator whether directly or indirectly to anyone in connection with a trade carried on by him”.
Amount on which VAT is chargeable
It is important to note that the taxation of fringe benefits under the VAT Act derives its values from the Income Tax Act. Therefore the consideration for the supply of fringe benefits for purposes of VAT Act is determined in accordance with provisions set out in the Income Tax Act. The Income Tax Act stipulates that value of fringe benefits other than a payment by way of an allowance, shall be determined in the case of right of use of accommodation (board or quarters) by reference to open market rental of the accommodation and the cost to the employer for any other benefit. The cost to the employer is the amount of any expense incurred by the employer in connection with the provision of the benefit. This is what the employer has paid or incurred in order to provide the benefit to the employee. The Income Tax Act also provides specific valuation rules for certain benefits like the right of use of employer motor vehicle which is based on the engine capacity of the motor vehicle granted. The fringe benefits are deemed VAT inclusive and in order to compute output tax employers must multiply the consideration for the supply by the tax fraction (15/115).
In conclusion it is important to keep in mind that VAT is designed as a tax on final consumption, regardless of the manner in which final consumers acquire the goods or services. Hence the reason for charging VAT on fringe benefits supplied to employees by their employers. But some of the fringe benefits are disqualified from being subject to VAT by certain reasons as stated above. Failure to take this into consideration can result in the understatement of the VAT returns which then attracts penalties from the Zimbabwe Revenue Authority. This will thus have a negative impact on the business. Failure to also consider the exemption of some fringe benefits from VAT can result in the overstatement of VAT and this can pose an unnecessary tax burden on the taxpayer. Employers should reconcile the PAYROLL and VAT returns for the fringe benefits that are taxable, the two records must be the same in so far as the consideration for the supply is concerned.