VAT for PBOs registered as welfare organisations
When a South African PBO can register for VAT as a welfare organisation, the input tax it can claim on free services, and how to record it in its books.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa
A children's home spends heavily on food, bedding, school uniforms, electricity and the repairs an old building always needs. Every one of those invoices includes VAT. The home charges nothing for the care it gives, so in the ordinary way it would have no output tax and no reason to register. The VAT it pays is simply a cost.
SARS's rules for welfare organisations change that picture for some public benefit organisations. This article explains when a PBO can come into the VAT system as a welfare organisation, what input tax it may then claim, how that differs for other PBOs, and how to keep the records straight.
A note on the source: SARS's VAT 414 guide, quoted below, is based on legislation as at January 2016. Use it for the principles and take current thresholds from SARS's current pages.
Welfare organisation status
SARS says an approved PBO may be classified as a welfare organisation under the VAT Act, which brings it into the VAT system without the normal registration requirements. Other PBOs, SARS says, may have to register if their taxable supplies meet the registration requirements.
The starting point is therefore PBO approval. An organisation that has not yet been approved as a PBO cannot rely on this route, and its founding document is often what stands between it and approval; see what a PBO's founding document must say.
Input tax on activities supplied for nothing
SARS's VAT 414 guide says an approved PBO that carries on listed welfare activities may register for VAT voluntarily and deduct input tax on those activities, even if its supplies are made for no consideration.
That is the heart of the benefit. For the children's home, the care it gives is supplied free, yet once registered as a welfare organisation it may deduct input tax on the costs of those listed welfare activities. Food for the children, bedding, cleaning materials and maintenance of the building used for the activity are the kinds of costs that come into question.
The words "listed welfare activities" matter. The organisation's activities need to be matched against the activities SARS lists before registering, and the match should be recorded. An organisation that runs a listed activity alongside something else, such as a fundraising event business, needs to separate the costs.
Entertainment that is part of the work
Ordinarily, a vendor cannot deduct VAT on entertainment. The VAT 414 guide says a welfare organisation may deduct input tax on entertainment that is integral to a welfare activity, such as food and accommodation for needy children.
For a children's home, a shelter or a feeding scheme, the "entertainment" in question is the core service, not a staff party. A year-end function for volunteers is a different matter and should not be swept into the same category. Keep the two on separate accounts so the distinction survives into the VAT return.
Donations stay outside VAT
The VAT 414 guide also says an association not for gain does not account for output tax on money, goods or services received as a donation, and that the donor may not deduct input tax on the donation. The same guide says such an association may be registered on the payments basis of accounting for VAT.
Where the PBO is also an association not for gain and is funded mainly by donations and grants, the payments basis can match how its money actually moves. Weigh it as a separate decision from registration itself. The donation and charity-shop rules are covered in more detail in VAT for non-profits: donations and charity-shop sales.
Other PBOs and the ordinary tests
A PBO that does not carry on listed welfare activities is not shut out of VAT. SARS says such organisations may have to register if their taxable supplies meet the registration requirements. A PBO running a fee-paying training centre or a shop selling new goods is the typical example. For these, the ordinary registration tests apply, and the special input tax rules for welfare activities do not.
Working in the client's own books
If the PBO's books are on Achekam and your firm is appointed to them, the firm works directly in the organisation's own ledger, with no copy made, so what the firm posts appears in the organisation's own accounting screens.
On the purchases side, a South African business's supplier bills and purchase orders take 15% or 0% VAT per line, and bills post input VAT to the ledger. For a welfare organisation, that is where input tax claims start. Two habits keep them defensible:
- Capture each supplier bill with its VAT line as it appears on the tax invoice, so the ledger's input VAT agrees with the documents.
- Code each bill to an account that shows which activity it served, so costs of listed welfare activities, integral entertainment and other activities can be told apart when the return is prepared.
At year end, the statements follow on the same ledger. Achekam has statement templates for non-profits, among others, with wording written for South African practice, so the PBO's annual statements describe its funds and activities in terms its board, funders and SARS will recognise.
A checklist before registering
- PBO approval letter on file.
- Activities matched to SARS's listed welfare activities, with the reasoning recorded.
- Costs of non-qualifying activities identified and coded separately.
- A decision on the payments basis, with any written application on file.
- Supplier bills captured with their VAT lines and coded by activity.
The guide to work from
SARS's VAT 414 guide for associations not for gain and welfare organisations sets out how the VAT Act applies to these bodies, including which supplies are taxable or exempt and how registration works. Read its welfare organisation sections with the PBO's list of activities in hand before advising on registration.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
