VAT on Construction of Residential Accommodation
Member Query
A developer purchased a piece of land, and a VAT-registered contractor will build houses according to drawings provided by the developer. The contractor will purchase all construction materials and, upon completion of the project, will receive one house as profit.
Can the contractor claim input VAT on material purchases while the project is ongoing, and how should output VAT be handled at the end of the project?
Our Response
Yes, the contractor can claim input VAT on materials purchased during construction, provided they are used to make taxable supplies. However, output VAT must be accounted for when the house is received or when an invoice is issued, whichever occurs first.
Detailed Explanation with Legal References:
Enterprise Activity
The contractor is engaged in an enterprise activity as defined in Section 1(1) of the VAT Act since constructing residential properties for consideration (even non-monetary consideration, such as receiving a house) qualifies as an "enterprise."
“A person can be regarded as conducting an enterprise when making only one supply, for example, the construction of a house and the sale thereof.” (Section 2.1.1, VAT 409 Guide)
Claiming Input VAT
Since the contractor is VAT-registered, they are eligible to claim input VAT on materials acquired for taxable supplies.
"Input tax may be deducted to the extent that the goods or services are acquired for consumption, use, or supply in the course of making taxable supplies." (Section 17(1), VAT Act)
Output VAT Responsibility
The receipt of the house by the contractor is considered a barter transaction involving non-monetary consideration. Each party is deemed to have made a taxable supply.
Output VAT becomes due at the earlier of:
Receiving the completed house; or
Issuance of an invoice according to the agreement.
The supply value for output VAT purposes is determined by the open market value of the completed house.
A supply is deemed to take place at the time an invoice is issued or any payment is received, whichever occurs first (Section 9(1), VAT Act).
The value of a supply where consideration is not in money will be the open market value of the supply (Section 10(4), VAT Act).
Best Practices and Compliance Advice:
Maintain accurate records of all input VAT claimed on materials used during construction.
Clearly document the terms of the barter transaction to establish the timing and valuation of the completed house.
Consult the SARS VAT 409 Guide regularly for examples and further clarification to ensure compliance and accurate VAT submissions.
For further details, consult the SARS VAT 409 Guide: SARS VAT 409 Guide for Fixed Property and Construction.
