Is the penalty rate stated in the Contract Data of a contract in terms of the GCC 2015 subject to VAT?

Penalties may be imposed should a Contractor fail to complete the Works to the extent which entitles him to receive a Certificate of Practical Completion by the Due Completion Date in terms of Clause 5.13 of the General Conditions of Contract for Construction Works (3rd Edition, 2015) (hereinafter referred to as “GCC 2015”).

When calculating the amounts certified and payable to the Contractor the Employer’s Agent has to take the amount of penalties due to the Employer by the Contractor in terms of Clauses 6.10, 6.10.1 and 6.10.1.7 of GCC 2015.

In terms of Clause 6.10.1.8 the Engineer needs to calculate the sale tax or VAT which the law requires the Employer to pay the Contractor.

GCC 2015 is however silent on whether an amount that does not state if it is inclusive of exclusive of VAT is deemed to be inclusive or exclusive of VAT. As a result, one has to look beyond GCC 2015 to other documentation that is applicable to the Contract.

In terms of Clause 1.3.2 of GCC 2015, “The law which is to apply to the Contract, and according to which the Contract is to be interpreted, shall be the law of the Republic of South Africa,…..” one would have to look at the relevant laws to determine if the penalty amount as stipulated in the Contract Data is to be deemed to be inclusive or exclusive of VAT.

Section 64 of the Value Added Tax Act 89 of 1991 (hereinafter referred to as the “Act”) states the following,

“64  (1)   Any price charged by any vendor in respect of any taxable supply of goods or services shall for the purposes of this Act be deemed to include any tax payable in terms of section 7 (1) (a) in respect of such supply, whether or not the vendor has included tax in such price.

In terms of Section 64 (1) of the Act any rate which does not stipulate that VAT is excluded such rate will thus be deemed to be inclusive of VAT.

Section 7 of the Act states as follows,

“7.   Imposition of value-added tax

• Subject to the exemptions, exceptions, deductions and adjustments provided for in this Act, there shall be levied and paid for the benefit of the National Revenue Fund a tax, to be known as the value-added tax on the supply by any vendor of goods or services supplied by him on or after the commencement date in the course or furtherance of any enterprise carried on by him;
• on the importation of any goods into the Republic by any person on or after the commencement date; and
• on the supply of any imported services by any person on or after the commencement date,

 calculated at the rate of 14 per cent on the value of the supply concerned or the importation, as the case may be.”

As is evident from the Section 7 of the Act VAT is payable in respect of goods sold or imported and or services rendered or imported.

In terms of Section 1 of the Act goods are defined as,

“1.   ‘goods’ means corporeal movable things, fixed property and any real right in any such thing or fixed property, but excluding-

• money;

• any right under a mortgage bond or pledge of any such thing or fixed property; and
• any stamp, form or card which has a money value and has been sold or issued by the State for the payment of any tax or duty levied under any Act of Parliament, except when subsequent to its original sale or issue it is disposed of or imported as a collector’s piece or investment article.”

In terms of Section 1 of the Act services are defined as,

“1.   ‘services’ means anything done or to be done, including the granting, assignment, cession or surrender of any right or the making available of any facility or advantage, but excluding a supply of goods, money or any stamp, form or card contemplated in paragraph (c) of the definition of ‘goods’.”

To determine if VAT is payable in respect of the Act one is to firstly determine if the payment being made is a payment in respect of goods and/or services, as defined vide supra, and secondly are such goods being delivered or services being rendered are in the course or furtherance of any business carried on by the Employer.

In order to charge VAT on any services rendered or imported or goods delivered or imported, such services rendered or imported or goods delivered or imported must be within the course and scope of the business alternatively in the furtherance of such business.

Therefore, firstly, should any rate contained in the Contract Data not specify that such rate specifically excludes VAT such rate is deemed to be inclusive of VAT.

Secondly, the imposition of delay penalties issued against a Contractor for the execution of Works after the Due Completion Date is not the business does of an Organ of State nor does it further the business of an Organ of State and thus VAT cannot be added thereto.

Thirdly, in respect of private entities too would not carry out the business of issuing penalties nor would such penalties by issued in the furtherance of the private entities’ business and the private entities would too not be entitled to add VAT to such penalties.

The Employer’s Agent therefore needs to calculate the total amount due in the monthly payment certificate and thereafter add VAT and only thereafter would the Employer’s Agent be entitled to deduct the penalty amount as calculated at the rate stated in the Contract Data.