VAT on short-term lettings and commissions

Are you acting as agent or principal and what would be the pragmatic approach?

There are very few people across the world who haven’t heard of Airbnb.

Started in San Francisco in 2008, this multi-billion-dollar NASDAQ-listed company that employs around 7,000 people has revolutionised the short-term letting industry. Over four million property owners around the world use the platform to let their properties.

And yet, their business model is actually quite simple. A property owner makes their property available for letting. Airbnb makes their platform available to list the property and collects the fee for the accommodation on the owner’s behalf.  For this service, Airbnb charges a commission.

However, while the emergence of Airbnb has provided intense competition for the existing players in the industry, this doesn’t mean that the local agency model is dead. In fact, many people still prefer the personal touch when it comes to entrusting their property for letting.

With this in mind, I was approached for a one-off opinion for a client that was a registered VAT vendor engaged in the business of letting out accommodation on behalf of various owners.

Given that the client did not own the properties concerned and was merely acting as agent, they wanted to know how to correctly account for VAT on the various transactions going through their books. These transactions were effectively as follows:

• The agency would charge their client (the property owner) an amount based on the going rate per night for accommodation.
• They would also charge the owner a commission for letting out such accommodation.
• Since they had collected the charge for the accommodation on the owner’s behalf, they would deduct their commission from these funds and pay the balance (net of commission) to the owner.

If the agency was not registered as a VAT vendor, a simple example would be as follows:

• Cost of accommodation: R5 000.00
• Less: Commission: (R1 250.00)
• Amount payable to owner: R3 750.00
  
  

However, the fact that the agency was registered as a vendor for VAT purposes means that VAT must be charged on all taxable supplies. This leads to the question of what constitutes a ‘supply’ in this particular case.

By way of background, the agency’s clients were mainly corporate entities who sourced accommodation from a variety of sources (including hotels), and the agency would be required to add VAT to all of their supplies. However, neither the Value-Added Tax Act 1991 nor the various SARS VAT Interpretation Notes provide a clear directive.

One could therefore argue that the letting of the accommodation is not a taxable supply made by the agency, since they are merely acting as an agent on behalf of the property owner. Based on this strict interpretation, a conclusion could be drawn that the accommodation portion should not in fact include VAT.

However, it is a common practice in this particular industry that accommodation charges are deemed to include VAT, and a corporate customer would want to be in a position to claim this VAT charged as an input.

If the accommodation had in fact been owned by the agency, the matter would be cut and dried—they would be required to charge VAT. It is the fact that the property concerned was not owned by the agency that has given rise to the ambiguity.

In the absence of clarity in terms of legislation and SARS publications, I have therefore based my opinion on prevailing practice as applied by agents who manage commercial premises. In such cases, although the managing agent concerned is not the owner of the premises in question, their invoices normally include VAT.

As for the commission that the agency charges, it is clearly a supply since it relates to the rendering of a service by the agency. VAT at the standard rate must therefore be charged on the commission.

An example of the accounting entries would therefore be as follows (assuming a commission rate of 25%):

Cr. Owner (creditor) - R869.57

Cr. VAT control (output VAT) - R130.43

Raising the accommodation charge against the agency’s client on the owner’s behalf

Cr. Accommodation client (debtor) - R1 000.00

The accommodation client settles their account

Cr. Commission income - R217.39

Cr. VAT control (output VAT) - R32.61

Raising the commission charge against the owner (R869.57 x 25%, plus VAT at 15%)

Cr. Bank - R619.57

Payment of the amount due to the owner (R869.57 less R250.00)

The agency would issue a tax invoice to the client for the accommodation, and a separate tax invoice to the owner for the commission amount.

In this case, the owner is receiving R1 000.00, less the R130.43 VAT portion, less the R250.00 (R217.39 + VAT) charged as commission. If the owner wanted to come out with a net R750.00, then the accommodation in this example would have to be priced at R1 000.00 plus VAT.

WRITTEN BY STEVEN JONES

Steven Jones is a registered SARS tax practitioner.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).