Key Takeaways:
- The National Treasury is considering a change to how private schools are treated under VAT law, which could have significant financial implications for schools that rely on income beyond school fees.
- The proposed amendment would remove schools from the VAT system entirely, forcing VAT-registered schools to deregister and potentially triggering a significant VAT payment.
- The change could result in schools losing the ability to recover VAT on future expenses, increasing their ongoing costs and affecting their ability to maintain facilities, hire staff, and invest in new infrastructure.
- The proposed amendment has been described as unusual and could have unintended harm to the education sector.
- The law firm Bowmans has submitted its concerns to the National Treasury and SARS, urging them to reconsider aspects of the proposal.
Introduction to VAT Law Changes
The South African National Treasury is considering a major change to how private schools are treated under VAT law, which could have significant financial implications for schools that rely on income beyond school fees. The proposed amendment to the Draft Taxation Laws Amendment Bill could have serious cash flow implications for schools that supplement their budgets through commercial activities such as hiring out sports fields and halls, running tuckshops, or offering accommodation at certain times of the year. When income from these activities exceeds R1 million a year, schools are currently required to register for VAT, and while education itself is VAT-exempt, VAT-registered schools can claim back a portion of the VAT they pay on expenses linked to their taxable activities.
Current VAT Rules and Proposed Amendments
The current VAT system allows schools to claim back a portion of the VAT they pay on expenses linked to their taxable activities, which helps offset some operating costs. However, the National Treasury now plans to remove schools from the VAT system entirely, with the draft amendment proposing that, from 1 January 2026, all goods and services supplied by schools registered under the South African Schools Act will be VAT-exempt. This would force all VAT-registered schools to deregister, even though their commercial activities would continue. According to global law firm Bowmans, the concern is what happens next, as VAT-registered schools would be required to pay VAT on the full value of their assets, including buildings and equipment, when they exit the VAT system.
Potential Financial Implications
The proposed amendment could have significant financial implications for private schools, particularly those that have acquired valuable assets over time. A school that was only able to claim VAT on a small portion of a new hall’s cost could still be required to pay VAT on the full value of that hall when it exits the VAT system. Although the proposal allows private schools to pay this VAT over 12 months, Bowmans said the amounts involved could still be significant. Many schools hold valuable assets, some of which were acquired long before they became VAT-registered. Beyond the once-off tax impact, schools would also lose the ability to recover VAT on future expenses, increasing their ongoing costs. There are also concerns about added administrative work and the possibility of SARS reassessing previous VAT claims.
Concerns and Criticisms
The proposed amendment has been described as unusual and has raised concerns among educators and legal experts. Bowmans has warned that the amendment could affect schools’ ability to maintain facilities, hire staff, and invest in new infrastructure. The firm has submitted its concerns to the National Treasury and SARS, urging them to reconsider aspects of the proposal to avoid unintended harm to the education sector. The potential financial implications of the proposed amendment are significant, and it is essential that the National Treasury and SARS carefully consider the potential consequences of their actions. The education sector is already facing significant challenges, and any changes to the VAT system should be carefully thought out to avoid exacerbating these challenges.
Conclusion and Recommendations
In conclusion, the proposed amendment to the Draft Taxation Laws Amendment Bill could have significant financial implications for private schools in South Africa. The potential loss of VAT recoveries and the once-off tax payment could have a significant impact on schools’ cash flow and ability to maintain facilities, hire staff, and invest in new infrastructure. It is essential that the National Treasury and SARS carefully consider the potential consequences of their actions and engage with stakeholders to ensure that any changes to the VAT system are well thought out and do not have unintended harm to the education sector. The law firm Bowmans has urged the National Treasury and SARS to reconsider aspects of the proposal, and it is hoped that their concerns will be taken into account to avoid any negative consequences for private schools in South Africa.