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Employers are required to ensure that all their employees are tested for the COVID 19 virus before resuming operations. Private entities are charging a minimum of USD$25 for the tests. According to Statutory Instrument 99 of 2020, these are costs to be borne by the employer. Therefore, over and above monthly salaries and expenses to be incurred by businesses, employers still need to foot this expense if they wish to open during the partial lockdown. These costs are beyond reach of most employers especially small businesses. One of the frequently asked questions in light of this is whether or not test costs are tax deductible given their novice nature, a matter which we fully evaluate in this article.
The Income Tax Act provides that expenses incurred in the production of income or for the purposes of trade may be deducted against gross income. In the case of COT v Rendle it was held that an expense is incurred in the production of income if it is necessary for the performance of the business operation or if it is attached to the performance of the business operation by chance or closely connected to the performance of the business operation or if it is a bona fide expense incurred for the more efficient performance of business operations. A purposive interpretation of the law, in this instance, would support the deductibility of the cost of carrying out COVID 19 tests. The carrying out of COVID 19 tests is mandatory for every entity opening up during the lockdown thus making it necessary for the performance of business operations. This view is also supported by the case Port Elizabeth Electric Tramway v CIR which held that expenditure is incurred in the production of income if the act to which the expenditure is attached is performed for purposes of trade, and the expenditure is closely linked to the production of income. Employers are incurring costs of procuring sanitisers and masks for their employees, which all add up to a huge cost base and are also mandatory for the businesses to operate. Distinct from new licensing costs which are disallowed because they entitle acquisition of right, COVID test costs are closely linked to the production of income and are necessary for the performance of the business operation. They are more meant to protect the lives of employees from the Covid 19 virus whilst undertaking their duties. Accordingly, such costs can be safely deemed as expenditure incurred in the production of income hence can be deducted for income tax purposes.
There also VAT considerations to think of regarding COVID -19 induced expenditure. The VAT Act produces provides for the refund on input tax incurred by registered operators in respect goods or services acquired by them wholly for the purpose of consumption, use or supply in the course of making taxable supplies. The crust matter is that there should be a direct link between the goods or services used and the taxable supply and not necessarily a sufficiently close relationship with the trade in the course of which the taxable supplies are made. Therefore if one can justify that the expenditure induced by COVID-19 is intended for use in the production of taxable i.e. standard or zero rated supplies then VAT will be claimable on such expenditure. As stated above, the expenditure is mandatory on the part of the employer and if such expenditure is not incurred then there will not be any to produce taxable supplies. However for businesses that are VAT exempt or not registered for VAT, input tax incurred is a cost of doing business. They cannot claim the expenses for input tax purposes. Meanwhile VAT input tax is claimed where an operator has incurred the VAT. Therefore where no VAT was incurred there is nothing to claim. For instance SI 88 of 2020 has exempted or zero rated medical goods hence VAT cannot be claimed on the listed goods.
Apart from these costs, businesses are incurring losses from some of the restrictions of the lock down. The only modes of transport in operation are the ZUPCO buses, which are very limited and may not be able to efficiently ferry employees to their work places on time. In order to some circumvent these challenges, some employers have opted to have their employees work from home. We spoke in our previous article that home costs may be deductible if they are proved to be necessary for the carrying out of business and sufficient documentation is supplied. For employees that can work from home, employers may therefore weigh in on the cost implications thereof vis that of having employees work at the offices. Unfortunately, the costs of conveying employee from home to place of work, although deductible to the employer is taxable benefit to the employee.
The Covid 19 pandemic has resulted in a lot of misfortunes for most entities. The arising of the costs associated to the Covid 19 pandemic are a burden for most companies. It is therefore necessary that businesses treasure the tax incentives and advantages available by deducting the allowable expenditures and fully utilising such incentives.