Can one claim input VAT on expenses incurred for socio-economic development purposes?
12 August 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: If a company
is obligated by a contract with a customer to incur expenses regarding the
Socio Economic Development of a town, could the company claim the input VAT on
My client is obliged, in terms of a contract with a
state-owned enterprise, to provide for social development.
A: According to
the definition in section 1(1) of the Value-Added Tax Act "input tax”, in
relation to a vendor, means—
(a) tax charged under section 7 and payable in terms of that
(i) a supplier on the supply of goods or services made by
that supplier to the vendor; or
(ii) the vendor on the importation of goods by him…
where the goods or services concerned are acquired by the
vendor wholly (or partly) for the purpose of consumption, use or supply in the
course of making taxable supplies.
In terms of section 102(1) of the Tax Administration Act the
taxpayer (the vendor in this instance) bears the burden of proving that an
amount or item is deductible or may be set-off.
That is in addition to the documentary proof that is required in terms
of section 16(2) of the Value-Added Tax Act.
We accept that the issue doesn’t relate to that, i.e. that the vendor
will meet the section 16(2) requirement.
The vendor then will have to be able to prove that the goods
or services concerned were acquired by the vendor wholly (or partly) "for the
purpose of consumption, use or supply in the course of making taxable
In the De Beers case Judge Southwoord, whilst agreeing with
the minority view expressed by judges Navsa and Judge van Heerden dealt with
this issue as follows:
" To be entitled to deduct ‘input tax’ in the
calculation of his VAT payable, a vendor must be registered in terms of the
Act, must be carrying on an ‘enterprise’ and must have paid VAT on goods or
services which the vendor acquired wholly for the purpose of consumption, use
or supply in the course of supplying goods or services which are chargeable
with tax under the provisions of s 7(1)(a) of the Act (i.e. goods or services
supplied in the course or furtherance of the ‘enterprise’).”
Judge Southwood then continued as follows:
" The primary question requires that there be clarity as
to the nature of the ‘enterprise’ because the purpose of acquiring the services
and whether they were consumed or utilized in making ‘taxable supplies’ can
only be determined in relation to a particular ‘enterprise’. What the
‘enterprise’ consists of is a factual question. There must be a particular
activity which complies with all the requirements in the definition.”
And concludes by saying: "The question to be answered
therefore is whether NMR’s services were acquired for the purpose of making
‘taxable supplies’ in that ‘enterprise’.”
In arriving at his decision that "the services were not
acquired for the purpose of making ‘taxable supplies’ by an ‘enterprise’ which
mines, markets and sells diamonds” judge Southwood said that the "…services
were not acquired to enable DBCM to enhance its VAT ‘enterprise’ of mining,
marketing and selling diamonds. The ‘enterprise’ was not in the least affected
by whether or not DBCM acquired NMR’s services. They could not contribute in
any way to the making of DBCM’s ‘taxable supplies’. They were also not acquired
in the ordinary course of DBCM’s ‘enterprise’ as part of its overhead
expenditure as argued by DBCM. They were supplied simply to enable DBCM’s board
to comply with its legal obligations.”
The test therefore is different to the test applied when a
deduction for normal tax purposes is made – see for instance in the Warner
brothers case where the deduction (for normal tax purposes) of social
responsibility expenses were in dispute.
Your client will therefore have to prove that the taxes paid
on the expenses incurred in terms of the contract with the state-owned
enterprise to provide social development was for the purpose of making ‘taxable
supplies’ in that ‘enterprise’.
Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.