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Tax implications of Covid-19 related expenses incurred by an employer on behalf of an employee

Tax implications of Covid-19 related expenses incurred by an employer on behalf of an employee

November 8, 2021

Most employees and organisations have had to incur expenses over the last year in relation to the COVID-19 pandemic. Some of these expenses relate directly to employees. This article deals with how these expenses should be treated from a broader tax perspective.


Nobody expected or invited the COVID-19 pandemic and therefore was unprepared for an event of this nature. It has however had a devastating impact on many businesses and has also resulted in a category of expenses not previously incurred by employers and organisations in general.

From a tax perspective the main inquiries are whether the expenses can be deducted for income tax purposes, and where the expenses are liked to employees, whether a taxable benefit arises in the hands of the employees.

From a VAT perspective the question arises whether VAT vendors are entitled to claim input VAT in respect of COVID-19 expenses and how VAT on fringe benefits must be treated.

Income tax deductibility

It is unlikely that SARS will challenge the deductibility of Covid-19 related expenditure, and if they do challenge it, whether the challenge would be successful.

There is a persuasive argument that COVID-19 expenditure is directly linked to the day-to-day operations of a business, be it in the form of sanitising at the workplace or paying for employees to be vaccinated.

There are accordingly scarce grounds to argue that such expenditure cannot be regarded as normal operating expenditure incurred in the cause of running a business and that such expenditure does not qualify as deductible for income tax purposes.

The more pertinent question is whether a taxable benefit accrues to employees who directly benefit from such services.

Taxable fringe benefits

There are two possible scenarios to consider with vastly different tax consequences for employees.

An employer can either vaccinate or arrange for the vaccination of its employees, or employees can be vaccinated for their own account and the employer merely settles the account of the service provider.

The employee contracts with its own service provider

In this scenario the employer effectively settles the debt of the employee and the link to the vaccination is broken. Under these circumstances the employee would be taxed on the amount of the debt paid by the employer on behalf of the employee.

Not a great outcome, especially if it could have been avoided …

The employer contracts directly with the service provider

The supply of free services by an employer to an employee for the private benefit of the employee is regarded as a taxable benefit that accrues to the employee. The amount on which an employee is taxed is generally the cost to the employer of having the service supplied to the employee. The free vaccination of employees by employers constitutes a taxable benefit accruing to the employee, being the supply of free services to the employee.

But there is good news …

Where the services are classified as minimum prescribed benefits in terms of the Medical Aid Schemes Act, the value placed on the taxable benefit is nil. All COVID-19 related treatment is classified as minimum prescribed benefits. The amount on which the employee is therefore taxable is nil.

May a VAT input tax deduction be claimed by the employer?

The above depends on whether the contract for the delivery of the services is entered into with the employer or whether the employer merely settles the invoices issued to employees.

If the employer merely settles invoices issued to employees, the legal supply of the services is made to the employee and the employer will not be entitled to input tax relief in respect of such invoices (no supply having been made to the employer).

If the employer contracts with service providers to provide the services to their employees, the employer is the legal recipient of the services and there is no basis in law to disallow the input tax deduction in the hands of the employer. The services supplied to the employer would be linked directly to the ongoing operations of making taxable supplies by the employer.

The further issue to consider is whether output tax is payable on the taxable fringe benefit accruing to employees?

VAT and the taxable benefit

If a taxable benefit accrues to the relevant employees, the value to be placed on the benefit for income tax purposes is nil. The same value is used for VAT purposes. No output tax is therefore payable on any taxable benefit that may accrue to employees in respect of COVID-19 related services.


From the above it is clear that the manner in which the relevant services are acquired and supplied to employees will directly impact on the tax consequences.

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