The Tax Court recently, in a matter which Shepstone & Wylie represented the taxpayer, found in favour of the taxpayer when it said that there is nothing wrong in crediting a loan account in the funder's books of account by the taxpayer in the context of a funding agreement between the taxpayer and the funder. Such crediting of the loan account taxpayer's loan account in the funder's books of account amounted to a payment of the “consideration” in relation to the supply of goods and services invoiced. The funder and the taxpayer are both members of the same group of companies.

The taxpayers launched proceedings against SARS after an audit conducted by SARS, four years after the invoice was raised, determined that a tax invoice was not paid in the period of 12 months after the expiry of the tax period in which the input tax was claimed, as required by the provisions of section 22(3) of the Value-Added Tax Act. The effect of this provision is that where a vendor has claimed an input deduction on the basis of a tax invoice, but has not made payment thereof within the period of 12 months, the transactions is effectively reversed. Such reversal has the result of counteracting the benefit of the input tax previously deducted .

This section was amended with effect from 10 January 2012; the effect of the amendment being that section 22(3) does not apply where the supplier and recipient are both members of the same group of companies.

In interpreting statutory concepts, the court requires that a commercial meaning be given to statutory concepts. The commercial transaction in the current matter arose within the context of an agreed funding arrangement between the taxpayer and the funder, both in the same group of companies. Given this funding arrangement, had the funder’s loan account not been credited in the manner it was, the funder would have been required to advance funds to the taxpayer in order for its own invoice to be settled.

The dispute turned on whether in adjusting the liability to a long-term one, the taxpayer complied with the Value-Added Tax Act insofar as it “paid the full consideration in respect of such supply” which was the subject of the invoice it received from the funder
The court found that there was no deliberate manipulation in creating a bad debt with a view of creating a tax benefit, either by the taxpayer or by the funder. The court found that the crediting of the funder’s loan account by the taxpayer in the context of the funding agreement between the two companies amounted to payment of “consideration” in relation to the supply of goods and services invoiced.

It was not required of the funder to make a cash payment to the appellant in order to enable the appellant to settle the invoice with the funder in cash and had this occurred, the conduct would have risk accusations of roundtrip financing, of which the legislature disapproves.

The taxpayer being successful, the court found that it was only reasonable that SARS pay the taxpayers legal costs.