Staff Writer 
By Simbarashe Hamudi
THE treatment of Value Added Tax (VAT) on fringe benefits provided by employers to employees is a topic of considerable importance and complexity.
Section 17(3) of the VAT Act stipulates that employers who are VAT-registered operators must account for VAT when offering fringe benefits to employees in terms of the Income Tax Act.
This article aims to clarify what constitutes a fringe benefit, the mechanisms for assessing VAT implications, the applicable exemptions, and best practices for compliance in this complex area of tax law.
Fringe benefits, also referred to as employee benefits, encompass various forms of compensation that are provided to employees in addition to their regular salaries. These benefits can be diverse, ranging from the use of company vehicles to mobile communication allowances. According to the VAT Act, when an employer grants these benefits, it is understood as making a supply of goods or services. Consequently, this triggers VAT obligations unless indicated otherwise by specific exemptions.
Understanding the scope of what qualifies as a fringe benefit is crucial for employers. For instance, if an employee is permitted to use a company car for personal travel, the employer must recognise that this benefit falls under the purview of taxable supplies. Likewise, benefits such as airtime allowances or payments for personal travel services generally incur VAT liabilities. Conversely, there are specific fringe benefits that may be exempt from VAT as outlined in other sections of the Act.
Section 17(3) makes it clear that VAT applies to fringe benefits unless the benefit arises from particular exempt or zero-rated supplies. For instance, if a benefit is classified under zero-rated goods or services, or if it involves entertainment, the employer may not need to account for VAT. The distinction between taxable and exempt benefits is essential for maintaining compliance with tax regulations.
Certain examples highlight this distinction well. Taxable fringe benefits include the right to use an employer’s motor vehicle, mobile data allocations, or non-business travel, such as personal flight tickets. Conversely, exempt benefits might include accommodation provided by the employer, educational services, or supplies of fuel. Employers must be diligent in categorising their benefits correctly to avoid potential penalties or miscalculations in VAT obligations.
Entertaining clients or employees entails specific considerations under VAT law. The VAT Act defines entertainment broadly to include “the provision of food, beverages, accommodation, entertainment, amusement, recreation, or hospitality of any kind.” This definition captures a variety of employee perks, such as lunch arrangements or subscriptions to entertainment services. Generally, expenses incurred for entertainment purposes are not allowed as deductions for VAT purposes; thus, employers may find relief from VAT obligations when offering these benefits.
The assessment of VAT on fringe benefits follows guidelines established by the Income Tax Act, which instructs employers on how to value these benefits appropriately. For most fringe benefits, the valuation hinges on two primary considerations: the value to the employee and the cost incurred by the employer in providing the benefits.
For example, when an employee uses a company vehicle, the deemed benefit may vary depending on the vehicle’s engine capacity. This value is critical as it forms the basis for calculating VAT due. Employers must multiply this deemed benefit by a specified tax fraction to determine the VAT payable.
To facilitate this assessment, specific valuation tiers have been defined. For instance, vehicles with a capacity of up to 1,500cc are assigned a deemed benefit of $625 per annum, while those between 1,501cc and 2,000cc have a value of $830. As the engine capacity increases, so does the deemed value ― $1,250 for 2,001 to 3,000cc and $1,660 for capacities of 3,001cc and above. Understanding and accurately applying these values is crucial for fulfilling VAT requirements.
Moreover, recognising that fringe benefits are deemed VAT inclusive is an important aspect of the calculation. VAT registered operators must compute the output tax by applying the appropriate VAT fraction (15.5/115.5) to the fringe benefit value.
When it comes to VAT on fringe benefits, currency implications can considerably complicate the process. Employers need to account for the currencies in which their employees are paid, particularly when working with employees whose salaries are in foreign currencies. In such cases, the VAT must also be calculated and submitted in the same foreign currency to remain compliant with tax regulations.
For employees earning a hybrid salary partly in foreign currency and partly in local currency employers need to proportionately calculate their VAT obligations. This can necessitate a thorough approach to ensure that all benefits are categorised and assessed accurately, safeguarding against any future scrutiny from the tax authority.
Maintaining a clear distinction between standard rated, zero rated and exempt benefits is vital for employers. Certain fringe benefits are explicitly exempt from VAT obligations, which can include cash allowances for various purposes such as travel and entertainment, as well as long-service awards given in cash.
Other exempt fringe benefits include free meals and refreshments, holiday accommodation, and interest-free or low-interest loans provided to employees. Employers must understand that payments made on behalf of employees, such as debt repayment, do not qualify as supplies of goods or services and thus fall outside the scope of VAT.
Navigating the landscape of VAT on fringe benefits can be a complex endeavour, yet understanding the legal framework outlined in the VAT Act is important for employers. By effectively distinguishing between taxable and exempt supplies, accurately valuing benefits, and adhering to currency regulations, organisations can successfully manage their VAT liabilities.
The ever-evolving nature of tax laws mandates that employers stay informed about regulatory changes that may affect their obligations. By proactively assessing their VAT strategies related to fringe benefits, businesses not only protect themselves from potential penalties but also enhance their overall operational efficiencies.
In summary, the VAT treatment of fringe benefits requires diligence and a comprehensive understanding of current regulations that govern taxation in this area. By staying informed and enlisting the assistance of tax professionals when needed, organisations can adeptly manage their VAT obligations and navigate the complexities of the fiscal landscape with confidence and clarity. This comprehensive approach will empower employers to leverage fringe benefits effectively while ensuring compliance with tax laws, ultimately enhancing their overall business operations.
Hamudi is Tax Partner at Baker Tilly Central Africa, based in Harare, Zimbabwe. He can be contacted at +263 775 399 536 or simbarashe.hamudi@bakertilly.co.zw
