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Can one claim input VAT on expenses incurred for socio-economic development purposes?

12 August 2015   (0 Comments)
Posted by: Author: SAIT Technical
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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 these expenses?

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 section by—

(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 supplies”. 

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:

"[48] 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:

"[51] 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. 



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