A Uniform approach …

The income tax and value-added tax treatment of employer-branded clothing provided to employees are so closely knit together that one cannot be considered without the other. Ignorance of the rules could result in burning a hole in a taxpayer’s pocket.

Introduction

It is not uncommon in practice to provide uniforms to blue-collar labourers, especially in the manufacturing and construction industries. This generally takes the form of protective or industry regulated clothing.

Logic dictates that there should be no taxable benefit accruing to an employee under the above circumstances.

And then you get office wear with the (tiny) company logo hidden inside the inside pocket of the three-piece suit.

Let’s explore what the law says …

Income tax

The basic rules

Employees are taxed on taxable benefits that accrue to them. This is commonly referred to as fringe benefits.

The Seventh Schedule to the Income Tax Act contains the detail of what constitutes taxable benefits.

The Schedule excludes any amount which is exempt from normal income tax under section 10 of the Income Tax Act.

Do you have a section 10 card up our sleeve?

The Income Tax Act exempts from normal tax the value of any uniform given to an employee by an employer in instances where an employee is, as a condition of his or her employment, required while on duty, to wear a special uniform which is clearly distinguishable from ordinary clothing.

What does this mean?

It means that employer-provided uniforms do not constitute taxable benefits and the Seventh Schedule to the Income Tax Act is therefore not applicable. This means that no income tax is payable on the benefit of receiving the uniform.

The exemption only applies if the clothing is clearly distinguishable from ordinary clothing. This does not mean that it has to be a blue overall or boilersuit, but the branding on clothing should be prominent and visible, and the wearing of the clothing during work hours may not be optional.

If you are willing to be seen in the company shirt with the big company logo (and take the risk of being identified as a person from which clients may expect service), then you are out of the woods and no income tax will be payable on the clothing.

But what about the Value-Added Tax?

Value Added Act

The VAT Act imposes VAT on the supply of taxable benefits to employees to the extent that the taxable benefits consist of supplies of goods or services. The supply of clothing can hardly be held not to be a supply of goods, but is it a supply of a taxable benefit for VAT purposes?

Great news!

Remember, if a taxable benefit is exempt from income tax by the Income Tax Act, it does not constitute a taxable benefit for income tax purposes and therefore also not for VAT purposes.

So without any further ado we can draw the curtain on SARS’ claim for VAT on the clothing benefit; this means no VAT is payable on the clothing provided to employees!

And it gets better …

There is no basis to deny an input tax deduction on the costs incurred by the employer to supply the clothing to the employees.

No output tax, full input tax, you are welcome!

Conclusion

This is a bit of a tongue in the cheek article, but (at a very deep level!) demonstrates the interaction between income tax and VAT and that one should always be careful to appreciate the entire body of law that impacts on the tax treatment of an amount.