The issue of professional membership fees and the deductibility of input tax by employers that settle these fees on an employees’ behalf, has always been a contentious issue.
SAICA recently informed its members that a VAT ruling pertaining to the deductibility of input tax on its membership fees will not be renewed and that there would be no amendment to the Value-Added Tax Act, No 89 of 1991 (VAT Act) to address the incongruity. The ruling will be withdrawn with effect from 1 January 2013.

The failure by SARS to renew the VAT Ruling, coupled with no corresponding amendment to the VAT Act does not necessarily mean that input tax may not be deducted in relation to professional fees. It does however now solely becomes an interpretation issue, which inevitably will result in more disputes with SARS.

The deductibility of input tax on professional membership fees goes beyond SAICA and would affect any other payment made by an employer to a professional body on behalf of the employee, for example, payments made by legal firms to the various Law Societies.

As a basic principle, an input tax deduction is granted to a vendor where goods or services have been acquired wholly for the purpose of consumption, use or supply in the course of making taxable supplies. Where a vendor has acquired goods or services partly in the course of making taxable supplies, it would be limited to claiming input tax only to the extent that such goods or services were acquired.

There appears to be an anomaly under the VAT Act, where a sole practitioner can enjoy the benefit of claiming an input tax deduction as opposed to an incorporated entity, which, as the employer, pays the professional membership fees on behalf of its employees. As a result of this anomaly and its potential impact from a VAT perspective, SAICA obtained a ruling from SARS under s72 of the VAT Act seeking an interim measure on the recoverability of VAT on professional membership fees by other business forms while SARS considered SAICA's request that the VAT Act be amended to clarify the position.

In practice, SARS generally allows for input tax to be claimed by an employer to the extent that its employee is reimbursed for the expenditure incurred in relation to professional membership fees, provided a valid tax invoice in the name of employer has been issued and such obligation is contained in the employment contract of the employee. This practice is in line with a similar approach followed by the New Zealand tax authorities relating to professional membership fees. However, the withdrawal of the SAICA ruling exposes an apparent differentiation between sole practitioners who practice for their own account and other business forms that pay the professional membership fees on behalf of their employees.

It is understandable that, from a sole practitioner's point of view, the payment of the relevant professional membership fees can be argued to be services acquired directly in the course and furtherance of his enterprise. In the case of an employer, which is an incorporated entity, the question may be asked as to which party (ie the employer or employee) is the real or actual recipient of the supply. Furthermore, is there any difference between business related expenditure reimbursed by an employer such as travel and mobile phone and the reimbursement of professional fees which, by its very nature, is ultimately for the benefit of the employer and directly related to the employer's enterprise? The test may boil down to whether or not a taxable fringe benefit arises for the employee, it being argued that in the absence of a fringe benefit, there is no private or domestic element to the expense.

Employers paying professional membership fees on behalf of employees are required to review their current VAT policies for compliance in light of recent events. As stated above, the withdrawal of the SAICA ruling does not mean that there will be an automatic denial of input tax by SARS, however, it may create an environment for renewed disputes on this topic.

Written by Ruaan van Eeden, Director,  and Carmen Moss-Holdstock, Associate, Tax, Cliffe Dekker Hofmeyr