TC-VAT 1015 SG – 29 September 2014
08 October 2014
Posted by: Author: Erich Bell
Author: Erich Bell (SAIT Acting Head of Tax Technical)
This case is an appeal against Value-Added Tax assessments raised in terms of section 31 of the Value-Added Tax Act (No. 89 of 1991) (hereinafter ‘VAT Act’) by SARS (hereinafter ‘respondent’) for the appellant company’s VAT periods from 12/2007 to 12/2009 on the basis that accommodation and meals provided to the appellant’s limited duration contract employees when working on certain projects are ‘entertainment’ as defined in sec 1 of the VAT Act and that the input tax thereon are therefore specifically denied in terms of sec 17(2)(a) of the VAT Act.
The appellant’s principal place of business is in Johannesburg and it specialises in the sinking of shafts and the development of underground structures used for mining and hydropower purposes. When tendering for certain contracts, the appellant included the estimated cost of meals and accommodation in its contract price on which output tax was charged.
The appellant employs limited duration contract employees who are only employed for a specific project undertaken by the appellant. Given the fact that the appellant does not have its own accommodation facilities it contracted with third parties to provide hostel accommodation and meals to its employees at a location on or near the mines. These third parties charged output tax in terms of sec 7(1)(a) of the VAT Act on the supply of the accommodation and meals. The only issue before the Tax Court was whether the provision of the hostel accommodation and catering services obtained by the appellant for the limited duration contract employees constituted ‘entertainment’ as defined in sec 1 of the VAT Act.
‘Entertainment’ is defined in sec 1 of the VAT Act as follow (emphasis mine):
‘means the provision of any food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind by a vendor whether directly or indirectly to anyone in connection with an enterprise carried on by him’.
It should be noted that sec 17(2)(a) of the VAT Act explicitly denies an input tax deduction to the extent that that goods and services were acquired by the vendor for purposes of entertainment and states the following:
‘Notwithstanding anything in this Act to the contrary, a vendor, shall not be entitled to deduct from the sum of the amounts of output tax and refunds contemplated in section 16 (3), any amount of input tax—
(a) in respect of goods or services acquired by such vendor to the extent that such goods or services are acquired for the purposes of entertainment…’
At par  of the judgement, Mali AJ stated the following with regards to the rational of sec 17(2)(a) of the VAT Act (emphasis mine):
‘The purpose of the legislature in enacting the prohibition of input tax in terms of section 17(2)(a) of the Act is inter alia to avoid granting a deduction of input tax where the ‘entertainment’ in question involves a strong element of personal enjoyment, especially in circumstances where there is room for abuse.’
The appellant called two Human Resource Managers to testify that the food and accommodation were not luxurious as there was a lack of privacy because rooms were shared among employees, the lighting was poor and the taps were broken. They further testified that the contract employees preferred not to stay at the hostel and also made reference to the quality and quantity of the food. This was done by the appellant in an attempt to persuade the Tax Court that the food and accommodation provided to the contract employees were not intended for personal enjoyment. The respondent did not dispute the fact that the food and accommodation were not luxurious but it did concede that it was adequate.
The appellant heavily relied on the fact that the definition of ‘entertainment’ should be considered within the context in which it occurs in the VAT Act by making reference to C:SARS v Dunblane (Pty) Ltd 2002 (1) SAR 38 (SCA), Hoban v Absa Bank Ltd t/a United Bank and Others 1999 (2) SA 1036 (SCA) and R v Secretary of State for the Home Department  3 All ER 433 (JL). This was done in an attempt to argue that the provision of food and accommodation to the appellant’s employee should not be construed to be ‘entertainment’ because there is no personal enjoyment by the appellant and that the provision of any food beverages or accommodation should also be restricted to that which results in personal enjoyment.
The Tax Court held that none of the provisos to section 17(2)(a) of the VAT Act are applicable (even though this did not form part of the appellant’s argument). Mali AJ stated the following at par  –  (emphasis mine):
‘ There is no merit in the appellant’s argument that the court should take cognisance of the fact that "the food and the accommodation provided by the vendor to its employees were not intended for personal enjoyment”. It was argued furthermore that that was the mischief that the lawgiver sought to cure.
 In my view, the legislature intentionally prohibited input tax relating to the provision of food and accommodation as entertainment expenses without categorising the type of food and accommodation as being luxurious or adequate. It will be impractical, unnecessary and tedious exercise to typify food and accommodation as either luxurious or adequate before same is classified as entertainment. It is not for the court to run wide imaginations as to the type of food and accommodation that may be considered luxurious and therefore exempted from the prohibition as deductible input tax.
 It is trite law that food and accommodation are considered "entertainment” and therefore the input tax levied on them is not deductible. I find no problems with the interpretation of the applicable section of the Act that may warrant a resort to other canons of interpretation. The definition of the word "entertainment” is not ambiguous.’
The Tax Court therefore held that the provision of food and accommodation constitutes ‘entertainment’ as defined in sec 1 of the VAT Act and that the deduction of input tax is therefore explicitly denied in terms of sec 17(2)(a) of the VAT Act. The appeal was consequently dismissed.
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