Understanding the intricate details of Value Added Tax (VAT) in property transactions is critical for both buyers and sellers in Zimbabwe’s property market. Ignoring the complex nuances of Value Added Tax (VAT) can lead to severe financial consequences, placing immense pressure on both sellers and buyers. The stakes are high and a lack of diligence could result in unexpected costs that may destabilize financial outcomes and cash flows.
According to the VAT Act, the sale of immovable property by a registered operator is generally considered a taxable supply, meaning that VAT is due unless the property qualifies for specific exemptions. However, the application of VAT is not straightforward. For VAT to apply, the property must be a trade asset and used in the course or furtherance of the seller’s trade. The term “trade” is critical; for VAT purposes, it refers to activities involving the production of taxable supplies. Therefore, when an operator is involved in producing 100% exempt supplies, any property sold by them is exempt from VAT. This provision underscores the importance of understanding the nature of the property being sold, as VAT liability depends on its use in taxable activities. This means that VAT is only applicable when a registered operator sells a trade asset.
Exemptions do exist under the VAT Act, but they are narrow and specific and require precise documentation. For instance, property acquired before 1 January 2004 by a natural person, used primarily as a private residence, and for which no input tax deduction was claimed, may qualify for exemption. The VAT Act is unforgiving in its application, imposing strict conditions for exemptions and offering no leniency in cases of non-compliance. Properties deemed non-taxable, such as those acquired for non-trading activities or sold by non-registered operators, still require accurate documentation. Failure to meet these conditions can lead to substantial VAT liability, severely impacting the financial standing of the seller or buyer.
The risk intensifies for properties used in both taxable and non-taxable supplies. Registered operators must exercise caution when selling such properties, as the VAT Act deems them as being used in the furtherance of trade, requiring VAT to be paid in full upon sale. This rule applies even if the property was partially used for non-trading activities. Additionally, if property is sold to satisfy a debt and the original owner does not provide written confirmation that the sale is non-taxable, the VAT Act mandates that the transaction be treated as one in the furtherance of trade, thus subjecting it to VAT. Involuntary sales, such as those conducted under a power of sale, can also attract VAT if not properly documented. This is a critical trap that could ensnare those unaware of the intricate legal requirements, leading to significant, unexpected VAT liabilities.
The situation becomes even more precarious when dealing with deregistration. Upon deregistration, any goods or rights that remain part of trade assets are considered supplied immediately before deregistration, potentially triggering VAT unless specific exemptions apply. This rule also applies to fixed property, meaning that VAT could be triggered upon deregistration unless specific exemptions apply.
The sale of a “going concern” introduces another layer of complexity. For a transaction to qualify for zero-rating under VAT, it must involve the transfer of at least 51% of the trade, with both buyer and seller being VAT-registered. There must be a written agreement confirming the sale as a going concern and the business must continue operating in the same manner post-sale. A failure to meet these conditions could result in a significant and unexpected VAT liabilities, undermining the entire transaction. This provision is crucial for taxpayers to consider when structuring the sale of a business as a going concern which involves transfer of property.
Given the complexities involved, sellers and buyers must remain vigilant to avoid the significant financial setbacks that can arise from mishandling VAT on property sales. Without careful planning and strict adherence to the law, the financial consequences could be devastating. Sellers and buyers alike must approach transactions with a thorough understanding of their VAT responsibilities to avoid pitfalls that could lead to substantial VAT implications.