South Africa: Proposed VAT amendment to impact schools

A proposed amendment in the Draft Taxation Laws Amendment Bill will create a substantial cashflow problem for schools if it comes into effect.

Many schools supplement their income through taxable commercial activities such as letting facilities like sports fields and school halls; providing accommodation during certain periods; and tuckshop sales. Where the value of these supplies exceeds the ZAR 1 million registration threshold, the schools are obliged to register as VAT vendors.

Typically, these schools provide value added tax (VAT) exempt educational services as well as the commercial activities that are subject to VAT. On this basis, the schools are entitled to claim a portion of their expenses as VAT input credits.

These schools are now facing a major VAT amendment that is proposed to come into effect on 1 January 2026.

National Treasury has indicated that the policy intent was always to exclude schools from the VAT net and has proposed a change whereby all goods or services supplied by a school that is registered under the South African Schools Act, are exempt from VAT. This means that all schools that are VAT registered will be required to deregister as from the effective date, regardless of the fact that they will continue to perform commercial activities.

Any vendor that exits the VAT net is deemed to make a supply of all goods that form part of the assets of the enterprise immediately before it ceases to be a vendor. The corollary is that VAT is payable on the tax fraction (¹⁵/¹¹⁵) on the lower of the cost or open market value of the deemed supply. The reason for the deemed supply is presumably to ensure that where a vendor benefited by claiming input VAT, such benefit should be ‘recouped’ when ceasing to be a vendor.

However, in this case, it must be kept in mind that the schools would only have been able to claim input VAT on an apportionment basis.

For example, where a school’s supplies were 95% exempt and 5% taxable and it built a new school hall, it would have claimed input VAT on only 5% of the actual cost thereof. However, it does not appear that this is taken into account for the deemed supply. Hence, the school may now be liable to pay VAT on the full value of the school hall, even though it is only used proportionately for taxable supplies.

There appears to be no apportionment or other relief.

The amendment proposes that the exit VAT liability may be paid in 12 equal instalments or so many monthly instalments as the Commissioner for SARS may allow. While the 12-month period is described as a concession, it loses sight of the fact that:

• unlike most other deregistrations, these are active businesses with a potentially very valuable asset base;
• all assets forming part of the enterprise are included in the deemed disposal, irrespective of when they were acquired;
• the schools claimed input VAT in accordance with the legislation at the time; and
• the deemed disposal provisions do not provide for any kind of apportionment based on the school’s taxable and exempt supplies.

 The proposed amendment, which is unprecedented, has caused conternation.

In our view, the legislator is disregarding the fact that the commercial activities that these schools undertake are no different to the activities that other persons undertake that oblige them to be VAT registered.  The proposed legislation seems to discriminate between schools that carry on commercial activities/ supplies and other vendors that carry on the same commercial activities/ supplies. The reason for this is unclear, especially in the context of most schools needing to supplement the school fees with additional income in order to properly provide educational services to their pupils.

This amendment if promulgated in its current form would, invariably, impact the financial position of the affected schools and may have an impact on their ability to continue offering quality education, appointing staff members, improving school facilities and even undertaking outreach programs.

Bowmans is currently engaged in submissions to National Treasury and SARS to unpack the unintended consequences that this amendment may have on schools. Please contact one of the authors of this article if you would like us to make representations on your behalf.