Independent schools have voiced serious reservations about the proposed amendment to the Value-Added Tax Act that will force VAT-registered schools to deregister and pay an exit charge on the VAT claimed since registration.
In a presentation to the National Assembly’s Standing Committee on Finance last week, National Treasury downplayed the impact of the proposal.
In the Explanatory Memorandum to the draft Taxation Laws Amendment Bill (TLAB), published in August, Treasury stated it was never the intention to include schools in the VAT net, and the amendment seeks to provide clarity that all goods and services by registered schools will be exempt from VAT.
However, Treasury now claims the reason for the change is to lighten the “financial and administrative burden” of basic educational institutions that are required to account for VAT. In the Explanatory Memorandum, there is no reference to any institution requesting relief because it does not have the resources to issue tax invoices, submit VAT returns, or calculate apportionment percentages.
Conflating commercial and education services
In terms of the Act, the provision of educational services (such as tuition and boarding for a fee) is VAT exempt, while non-educational services – such as selling uniforms, running tuck shops, the renting school facilities – may be subject to VAT.
The Independent Schools Association of Southern Africa (ISASA) reacted to the initial explanation. There has never been any suggestion over the years that there was a lacuna in the law as it currently reads.
ISASA executive director Lebogang Montjane said in a comprehensive submission there has always been a distinction between exempt (educational) and taxable (commercial) supplies.
“It is therefore incorrect to describe the purpose of the proposed amendment as a clarification of a long-standing policy position that has been in place since the day the VAT Act came into effect, 30 September 1991.”
Montjane says the proposed amendment effectively conflates commercial activities with education services and disregards the fact that schools, particularly independent schools, need to undertake activities that may be deemed to be commercial “in order for them to provide a basic education that is not of an inferior quality than that which is being provided by a comparable public school”.
Discrimination
He questions the “arbitrary discrimination” between the VAT treatment of commercial activities depending on whether they are supplied by a school versus a non-school entity.
“It is noted that there are very limited entity exemptions from the VAT system […] It remains unclear why a distinction is proposed to be drawn between the commercial activities of universities or other tertiary institutions and those undertaken by schools,” Montjane adds.
“There appears to be no principled basis for affording preferential VAT treatment to one category of educational institution over another, particularly where both rely on commercial activities to subsidise educational operations and maintain institutional sustainability.”
ISASA further argues that the proposed change is contrary to international practice.
In Australia and Canada, tuition and boarding are free of general sales tax (similar to South Africa’s zero rating). However, commercial activities – such as tuckshops, the renting of facilities, or fundraising sales – are taxable at the standard rate of sales tax.
In Ireland, educational and university tuition and ancillary services such as accommodation and textbooks are VAT exempt. Commercial supplies that are not incidental to the provision of education – such as facility hire, fundraising sales, and uniforms and clothing – are taxed at the standard VAT rate.
In New Zealand, a school’s commercial activities, such as renting facilities and tuckshops, are taxable at the standard rate of 15%.
Catastrophic financial burden
In its submission, CityKidz Pre and Primary School, a public benefit organisation in Gauteng, said the proposed amendments will place a profound financial burden on CityKidz, as well as similar schools providing quality education to disadvantaged children. “Like CityKidz, most struggle to survive financially.”
The immediate impact is an “exit charge” for schools that have been claiming input VAT. This will place a potentially catastrophic financial burden on CityKidz, which may force it to close.
The exit charge is causing grave concerns.
ISASA provides the following example in its submission: A school has claimed a percentage input tax deduction of R260 869.57 on a huge sports hall that was constructed at a cost of R10 million (inclusive of VAT of R1 304 347.83). The input tax claim was based on the school’s taxable use of the sports hall for commercial activities – for example, 20%. On ceasing to be a vendor, the consideration for the deemed supply is R10m, assuming that the open market value is greater than R10m.
“It is unclear if the intention of the legislature is to tax the full R10m or to effectively recoup the VAT that was previously claimed.”
Montjane urged Treasury to reconsider implementation and allow time for the necessary research to fully consider the impact.
If passed, the amendment will be effective from 1 January 2026.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.
