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Rental, lease and ICA agreements – Don’t take your eye off the VAT aspect Part 2

Rental, lease and ICA agreements – Don’t take your eye off the VAT aspect Part 2

June 8, 2023

Special VAT rules apply to rental, lease and ICA agreements. It is important to understand these rules to avoid incorrect VAT reporting of such transactions. In this second article of this short series we deal with the specific VAT rules applicable to each category of supply.


In the previous article we dealt with the classification of ICAs and rental agreements for VAT purposes. If you have not read the article, we recommend that you first read it before reading this article to provide the necessary context.

In this article we deal with the specific VAT rules applicable to each category of supply.


The more things are the same the more things are different …

When is output tax payable on ICA supplies?

Normally output tax on supplies is payable at the earlier of the receipt of any payment of the consideration for the supply or the issuing of an invoice.

But not for ICAs …

Output tax for supplies made in terms of ICAs must be paid in the tax period that any part of the consideration is received, or the goods is delivered to the client, whichever event takes place first.

So, if a motor dealer sells a motor car to a customer and the first instalment is only payable after a period of time, the full output tax liability is payable when the car is delivered to the happy customer.

And then the value on which VAT is payable

This rule is quite simple. Output tax is payable on the capital value of the sale. No VAT is accordingly payable on finance charges levied in terms of the agreement.

And now something you did not know …

Output tax on ICAs is always payable on the invoice basis irrespective of whether the supplier is registered on the payments basis.

The recipient of the supply is also entitled to a full input tax deduction on conclusion of the agreement irrespective of whether or not the recipient is registered on the payments basis.

Well, did you know this?


ICAs are normally concluded with commercial banks. The supplier of the actual commodity or goods therefore sells the goods to the bank who on-sells the goods in terms of the ICA to the client.

The commercial bank must issue a tax invoice to the client and the client will be entitled to claim the input tax deduction based on the tax invoice issued by the bank, not by the supplier.

Let’s move on to rentals

The VAT treatment of rentals is pretty much “what you see is what you get”.

The amount on which output tax is payable

VAT is payable on the full rental charged including any potential interest included in such rental.

Sometimes people complain that VAT on rentals is payable on interest as well. The simple answer is: yes, it is what it is!

When is the output tax payable?

Another funny rule …

Output tax is payable at the earlier of when any rental payment becomes payable or is actually received. It is therefore in no way linked to the issuing of any invoice.

From a planning point of view it is prudent to make rentals due on the first of a calendar month. This will ensure that the person receiving the rent can retain the VAT amount received in the business for close to 2 months before it becomes payable to SARS. Cash-flow planning.


A lessor does not need to issue tax invoices for rental payments if the agreement between the lessor and the lessee contains all the disclosure requirements for a tax invoice. No prior approval is required from SARS for this modus operandi.

The lessee may claim input tax based on the rental agreement held and does not need to hold a tax invoice.


The above is a short summary of the VAT rules applicable to ICAs and rental agreements.

In practice the challenge is to identify the nature of each agreement and then apply the VAT rules to such agreement. This sometimes requires adjustments in the operating systems to cater for various categories of supplies for VAT purposes, while the transactions are treated as a single category of transactions for accounting purposes.

Unfortunately it is what it is, and compliance is the responsibility of the taxpayer.

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