Regulation on domestic reverse charge relating to valuable metal

It came to Government’s attention that value-added tax (“VAT”) on second-hand goods containing gold was and still is a target of abusive and fraudulent activities. It was discovered that while a deduction of notional input tax on the acquisition of gold jewellery by VAT vendors from non-VAT vendors was allowed, in practice this provision significantly contributed to creating and enabling environment to obtain fraudulent input tax deductions as the VAT vendors would smelt jewellery along with gold coins and raw gold that was illegally acquired. Consequently, changes were made in 2014 to the definition of “second hands goods” in the VAT Act to the effect that vendors were not allowed to claim the notional input, unless such goods were resold in the same or substantially the same state as they were acquired.

Vendors have since developed a new strategy to claim undue VAT refunds from the fiscus in relation to goods containing gold. These vendors would acquire and supply Krugerrands, illegal gold, etc and introduce these types of goods into the production and distribution chain to manufacture gold mainly in the form of jewellery, bars, blank coins, ingots, buttons, wire, plate, granules, in a solution, residue or similar forms, for export purposes. Typically, these vendors utilise “invoice-farms” to create a paper trail to authenticate and re-characterise the supply of Krugerrands, illegal gold, etc which the nature, type and origin of the gold obtained from the Krugerrands, illegal gold, etc is deliberately misinterpreted. Therefore, numerous fraudulent registered vendors are interposed between the initiating vendor supplying the Kruger rands, illegal gold, etc and the last vendor that acquires the gold in the form of jewellery, bars, blank coins, ingots, buttons, wire, plate, granules, in a solution, residue or similar forms. Typically, the last vendor acquires these goods containing gold at a standard rate thus claiming input tax and subsequently export the goods as zero-rated supplies. The net effect results in the vendor claiming large VAT refunds from the fiscus and the VAT refunds are ultimately shared amongst the other interposed vendors involved in the production and distribution of the Krugerrands, illegal gold, etc.

This scheme is clearly aimed at claiming a large VAT refund at the final stage of the production and distribution chain, where input tax is deducted on the acquisition of the goods containing gold, in the form of jewellery, bars, blank coins, ingots, buttons, wire, plate, granules, in a solution, residue or similar forms and output tax is declared at the zero-rate by the vendor that undertakes the export of these goods.

To mitigate these VAT fraud schemes, it is proposed that South Africa should implement a mechanism called Domestic Reverse Charge (“DRC”) currently used in United Kingdom as an anti-fraud measure designed to counter criminals’ attacks on the VAT system. This DRC will be introduced through Regulations in terms of section 74(2) of the VAT Act (89 of 1991).

The DRC regulations will be aimed at all registered vendors involved in the entire production and distribution chain that make supplies of valuable metal. A valuable metal is defined in section 1 of the the VAT Act as:

“…any goods containing gold in the form of jewellery, bars, blank coins, ingots, buttons, wire, plate, granules, in a solution, residue or similar forms, including any ancillary goods or services but does not include supplies –

(a) of goods produced from raw materials by any “holder” as defined in section 1 of the Mineral and Petroleum Resources Development Act 28 of 2002, or by any person contracted to such “holder” to carry on mining operations in respect of the mine where the “holder” carries on mining operations; or

(b) contemplated in section 11(1)(f), (k) or (m) of the Act”

The provisions in the proposed section 74 (2) of the VAT Act are set out as follows:

(a) The supplier and recipient of valuable metal must both be registered vendors;

(b) The supply of valuable metal must be treated as standard rated supply by both the supplier and the recipient;

(c) The recipient of the valuable metal will be liable to account for and pay the output tax to the fiscus on behalf of the supplier;

(d) The recipient of valuable metal (if entitled to deduct input tax, subject to the provisions of section 16, 17, 20, and 21 of the VAT Act) is only allowed to deduct the input tax on the acquisition, if the recipient has already declared and paid output tax at 15% to SARS on behalf of the supplier;

(e) The supplier of valuable metal will not be entitled to input tax on irrecoverable debts as the recipient will account for and pay the VAT to SARS, on behalf of the supplier as the recipient would have been the one that declared output tax to SARS;

(f) The supplying vendor remains liable to levy/charge the VAT on the supply of valuable metal but will not collect such VAT from the recipient vendor. The recipient is obligated to pay output tax to the fiscus. Consequently, the VAT payable on the supply of valuable metal is aligned with the recipient’s entitlement to deduct input tax;

(g) If the supply of valuable metal is made to an end user, e.g., a fully exempt business or a person not registered for VAT, the VAT is to be charged, accounted for and remitted under the rules prescribed in the present VAT system, i.e., the DRC Regulations will not apply to transactions between such persons, as they are not transactions between vendors;

(h) The supplier of valuable metal must take reasonable steps to verify the VAT registration status of the recipient;

(i) The supplier of valuable metal is required to maintain and retain, as part of VAT recordkeeping, a list of all supplies subject to the DRC Regulations.

(j) The supplier and recipient of valuable metal must compulsorily inform SARS that they engage in transactions that fall within the ambit of the DRC Regulations, by updating their VAT registration status;

(k) If the recipient, inter alia, omits to account for and pay the domestic reverse charge VAT, the supplier and recipient shall be held jointly and severally liable for any VAT loss suffered by the fiscus. The supplier will not be held liable if it meets the prescribed administrative requirements, such as taking reasonable steps to verify the recipient’s VAT registration status, obtain, and retain the required records, including a list of all supplies subject to the DRC Regulations;

(l) The issuing of a tax invoice, debit and credit note will follow the normal VAT rules.

The proposed DRC Regulations will come into operation on 1 July 2022 and the vendors will be allowed a period of one month from 1 July 2022 to ensure that they comply with the requirements of these Regulations.

In light of the invoicing and system practicalities and the circumstances prevailing, the DRC Regulations will apply to all supplies of valuable metal from 1 August 2022.

For further information, please refer to the Frequently Asked Questions document here.

6/09/2022