How to treat VAT related to educational services supplied by educational institutions and private education suppliers

Background

A client provides music training to students at a school. The fees generated are approaching R1 million per annum.

Question

Are these services subject to VAT?

The VAT Act

Section 7(1)(a) of the VAT Act imposes VAT on the supply of goods or services made by a vendor in the course or furtherance of the VAT enterprise carried on by the vendor. VAT is imposed at the standard rate of (currently 15%) unless the supply qualifies to be made at the zero-rate in terms of section 11 of the VAT Act or is exempt from VAT in terms of section 12 of the VAT Act.

Exempt educational services

  1. Section 12(h)(i) of the VAT Act exempts the following supplies of educational services:
    1. Educational services supplied by the State, or a school registered under the South African Schools Act (Act No. 84 of 1996).
    2. Educational services supplied by a public college or private college established, declared, or registered as such under the Further Education and Training Colleges Act (Act No. 16 of 2006).
    3. Educational services supplied by an institution that provides higher education on a full time, part-time or distance basis and which is established or deemed to be established as a public higher education institution under the Higher Education Act (Act No. 101 of 1997), or is declared as a public higher education institution under the Higher Education Act (Act No. 101 of 1997), or is registered or conditionally registered as a private higher education institution under the Higher Education Act (Act No. 101 of 1997).
    4. Educational services supplied by a public benefit organisation (PBO) as contemplated in paragraph (a) of the definition of “public benefit organisation” contained in section 30(1) of the Income Tax Act that has been approved by the Commissioner in terms of section 30(3) of the Income Tax Act and which has been formed for:
      1. Adult basic education and training including literacy and numeracy education, registered under the Adult Basic Education and Training Act (Act No. 52 of 2000), vocational training or technical education.
      2. Education and training of religious or social workers.
      3. Training or education of persons with a permanent physical or mental impairment.
      4. Provision of bridging courses to enable indigent persons to enter a higher education institution.
  2. Section 12(h)(ii) of the VAT Act exempts from VAT “the supply by a school, university, technicon or college solely or mainly for the benefit of its learners or students of goods or services … necessary for and subordinate and incidental to the supply of educational services … if such goods or services are supplied for a consideration in the form of school fees, tuition fees or payment for lodging or board and lodging.

Application of the principles

If the music training is contractually supplied to a learner by one of the institutions listed above as part of the formal curriculum offered by the school, the charges for the training should fall within the ambit of the section 12(h)(i) exemption and not be subject to VAT.

If the training is supplied contractually to a learner by one of the above institutions but does not form part of the formal curriculum offered by the school, there is still an argument to be made for the charges to form part of charges for educational services being exempt from VAT.

If the training is contractually provided by an external party (private training) in terms of a contract between the learner and the service provider, the charges would normally not fall within the ambit of the exemption contained in section 12(h) of the VAT Act. The normal VAT rules must be applied to such supplies. For VAT purposes the supply of the services would constitute a supply of services subject to VAT at 15%.

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