Clinical trials and turbulation

The VAT treatment of clinical trials carried out in South Africa on behalf of non-resident principals has for many years been the subject of discussion and disputes between taxpayers and SARS. A new proposed amendment to the VAT Act will hopefully now bring the matter to a close.

Introduction

The VAT treatment of charges for conducting clinical trials in South Africa on behalf of non-resident principals has for many years been a bone of contention.

The dispute hinges on whether the charges may be zero-rated, being services supplied to non-residents. SARS held a strong view that the charges could not be zero-rated based on a very narrow technical interpretation of the VAT Act.

Proposed amendments to the VAT Act clarify that clinical trials and charges for similar services will, with effect from 1 April 2026, qualify to be zero-rated.

Why the dispute?

Services supplied to non-residents are usually zero-rated.

But there are always terms and conditions …

The zero-rating does not apply where the services are supplied directly in connection with movable property that is in South Africa at the time that the services are rendered, unless the movable property is subsequently exported.

The zero-rating also does not apply if the services are supplied directly to any person that is in South Africa at the time that the services are rendered.

 The impact on clinical trials

Why clinical trials?

Clinical trials are aimed at testing the effectiveness and safety of new medicines. The medicines are imported into South Africa and administered to participants in the clinical trials.

Based on the outcome of the clinical trials, an assessment is made on the effectiveness and safety of the medicines.

The VAT Act

The services of conducting clinical trials on behalf of a third person are clearly services for VAT purposes supplied to a non-resident. No dispute there.

But it is never that simple …

The first bone of contention is whether the services are supplied directly in connection with the medicine (moveable property) that is being tested, which will deny the zero-rating. On the face of it, that would appear to be the case. There is however a counter argument that the medicine is simply the medium used to extract data and that the real supply is the service of providing the data to the non-resident.

Very technical! But it does not end there …

The second contentious issue is whether the services can be held to be supplied directly to the participants in the clinical trials as the medicine is administered directly to them. If so, the services cannot be zero-rated. Again the argument against this proposition is that the participants are not the recipients of the supplies but are merely part of the process to extract data.

The solution

The solution to the above impasse will come in the form of an amendment to the VAT Act that will allow clinical trials conducted in South Africa, on behalf of non-resident principals, to be zero-rated. This will however only become effective on 1 April 2026 which means charges before that date will still be subject to the uncertainties currently experienced.

Summary

The proposed amendment is welcomed and will provide certainty in an area fraught with uncertainty for many years. With the effective date being 1 April 2026, careful planning should be done to ensure that the time of supply for clinical trials fees falls after that date, where possible.