Some employers strive to motivate their human capital by offering the same products or services to their employees as those they offer to their customers or clients, however, at a reduced price, rate or even for free.
Consequently, such preferential treatment is deemed to be a normal sale by the employer and a benefit in the hands of the employee which triggers Value Added Tax (VAT), particularly for VAT registered employers. We must make it clear that we are not talking about PAYE today, which is obviously due from those benefits. In this article, words importing the masculine shall be deemed to include the feminine.
The benefit
Preferential employee treatment or free benefits technically constitutes a superior favour or privilege that one is entitled to by virtue of being an employee of the service provider which consequently gives rise to a fringe benefit. A common example is where a lodge claims VAT in its lodge business but allows employees to occupy the lodge during holidays for free. Further, free meals provided by such lodge also trigger VAT.
Another example is where a courier company couriers employees’ baggage for free. The list of these benefits is endless and the critical thing is that the employer is required to account for VAT on such benefits as long as he claims VAT on the provision of the free services. For example, a courier company claims VAT when it acquires delivery vehicles and the free benefits to employees therefore trigger VAT. Further, a supermarket which offers its employees groceries for free must also pay VAT on such free benefits.
The law
The Vat Act provides that a supply for VAT purposes includes the ‘provision of goods or services to an employee for personal use’ provided the employer has been ‘allowed a deduction for input tax in respect of those goods or services.’ Accordingly, where an employer provides preferential services to its employees for free or below the prevailing market value of those services, the employer is deemed to have made a supply i.e., a fringe benefit, provided input tax has been allowed in respect of expenses incurred to provide the services.
The VAT on a fringe benefit is calculated and accounted for by the employer irrespective of whether or not he recovers the VAT from his employees. It is key to note that VAT on fringe benefit will apply to the extent to which the preferential service is ordinarily taxable i.e., charged VAT at 14 percent. Now, here is the technical part which needs a bit of attention. The fringe benefit supplied is deemed to be inclusive of VAT. Therefore, the VAT component is extracted by applying the tax fraction (14/114) on the value of the fringe benefit at the prevailing market value. Consequently, benefits which would ordinarily be exempt do not trigger VAT such as where a company offers interest-free loans to its employees. In this case, the benefit would be the interest portion that would have been paid. The same applies where an employer provides fringe benefits that would ordinarily be zero rated for VAT.
Conclusion
The overarching factor in this whole analysis is that VAT-registered employers should account for VAT where they provide preferential services or goods to their employees on which input tax would have been claimed on expenses incurred to provide those services or goods.
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