Working from home – The VAT nightmare when returning to your previous place of work

In the previous article we discussed the implications of selling a private residence partially used for VAT enterprise purposes. In this final article in this series we deal with the implications if a property is no longer used for VAT enterprise purposes.

Introduction

Where property is no longer used for VAT enterprise purposes, it can be the result of a complete cessation of the VAT enterprise or it could be that the actual VAT enterprise activities continue but are no longer conducted on or at the residential property.

The above two scenarios have vastly different VAT consequences. The consequences should be understood to plan the most effective exit from the VAT enterprise.

Where an enterprise ceases

Where a VAT enterprise completely ceases, all assets and rights capable of assignment cession or surrender are deemed to be sold by the VAT enterprise on the date before the enterprise ceases. The VAT vendor must account for output tax on such goods or rights as if it had been sold.

The good news is that the output tax liability is computed on the lower of the original cost or market value of the assets or rights on the date that the VAT enterprise ceases.

You may recall from the previous article that where mixed-use property is sold, the VAT vendor is entitled to a deduction of input tax/notional input tax to the extent that it could not previously be  claimed. If both the input tax deduction and the output tax liability are computed based on the original cost of an asset, no additional VAT cost is incurred by the VAT vendor as a result of the change in use.

For example, if the original property cost R1 million and was used 10% for taxable purposes, the VAT vendor would have been entitled to a deduction of 10% of the VAT/notional VAT on R1 million when the property was first used as part of the VAT enterprise carried on. When the VAT enterprise ceases the property is deemed to be disposed of for R1 million and the VAT vendor must account for output tax on R1 million. The VAT vendor would however be entitled to a deduction of the remaining 90% of the input tax/notional input tax that it did not claim before. The overall VAT impact is therefore cash neutral.

But if the enterprise continues …

Where an enterprise continues

Where the enterprise continues but is no longer operated from or partially from the residential property, the residential property is deemed to be supplied at the market value of the property at the time that the enterprise activities are no longer conducted on the property.

If the market value of the property is R5 million at the time that it is no longer used for VAT enterprise purposes and assuming that the original cost price of the property was R1 million, the VAT vendor will be allowed the VAT relief discussed above on R1 million but will be required to account for output tax on R5 million. The net impact is an irrecoverable cash cost to the VAT vendor.

Can you dodge the bullet …

One way to dodge the bullet is to deregister the VAT vendor while the property is still used for mixed purposes. This will only be an option if the annual value of taxable supplies made by the vendor falls below R1 million per year.

If the above option is not available, consideration should be given to continue using the residential property for VAT purposes, even though it might be at a reduced level. One option is to operate an administration office for the VAT enterprise from the residential property.

Conclusion

The key learning from this series of articles is to have absolute clarity of the consequences before tainting your private residence as a VAT enterprise asset. You should not be paying school fees if the lessons have already been taught.

Knowledge … application … planning …