VAT and the cost of having a profession

Many years ago I caused a stir when offered the fringe benefit membership of two reputable clubs for entertaining my clients. I asked for the cash instead.

I still don’t know whether the outrage was about declining a club membership, or about how a tax nerd could walk away from a tax-free fringe benefit.

Today, payment of a club subscription by an employer is a fully taxable fringe benefit.

Employers are excluded from deducting the expense in their personal tax returns because the general-deduction formula is not available to them, irrespective of how much business is concluded over gins and tonic.

Employers can, however, pay the professional subscriptions of their employees without triggering a fringe benefit. Fair enough. They have to remain members of their professions to keep their jobs.

But when it comes to VAT a different problem emerges. To call yourself a chartered accountant costs more than R10 a day these days. So when the annual tax invoice arrives – and it is made out to the member and not the member’s employer – the VAT cannot be reclaimed as input tax.

This leads to a technical inconsistency. VAT can be reclaimed by old-school CAs who operate as sole traders or in partnership. But their peers who saw the light and got a job with a company lose out.

For a while, sense prevailed and the SA Revenue Service issued a directive that employers could claim VAT on employees’ professional subscriptions. But the matter was referred to the Treasury and they ruled, “No ways. The law is the law.”

So SARS will get an additional R583 in VAT for every employed CA next year. If this applies to 20 000 or so CAs, that’s about R12-million, or about 5% of the president’s new complex in KwaZulu-Natal.

If the employer pays the subscription, the VAT-inclusive cost is tax deductible and the fringe benefit is still tax free. So, presuming that all professionals earn more than R617 000 a year, one can discount the effect by 40%.

But the poor sod whose employer will not structure the professional subscription into the employment package gets no tax relief at all.

Originally published in the Sunday Times: Money & Careers Tax Talk column.

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