In the recent judgement by a full bench of the Western Cape High Court, in the matter of ABC (Pty) Ltd v the Commissioner for the South African Revenue Service (6 February 2015), the South African Revenue Service (SARS) was reminded that, what’s good for the goose, is good for the gander.
The taxpayer, being a vendor for purposes of value-added tax (VAT), staged annual international jazz festivals in Cape Town. In the course of that enterprise it concluded sponsorship agreements with South African Airways, the City of Cape Town, the SABC and Telkom (Sponsors). In terms of the agreements the Sponsors paid money and provided goods and/or services for the festivals, and in return the taxpayer provided branding, marketing goods and/or services to the Sponsors. The transactions in terms of the sponsorship agreements constituted barter transactions.
During an audit of the taxpayer, SARS identified that the taxpayer had failed to declare output VAT on the goods and/or services provided to the Sponsors in terms of the sponsorship agreement, which resulted in assessments being raised. The taxpayer did not dispute that it was liable for the output VAT. However, the taxpayer contended that it should be entitled to offset the output VAT liability with a deduction in respect of the input VAT on the supplies made to it by the Sponsors.
The crux of the matter was that, despite requests from the taxpayer to the Sponsors, the taxpayer was not in possession of tax invoices containing the particulars prescribed in s16(2) of the Value-Added Tax Act, No 89 of 1991 (VAT Act). It was SARS’s contention in the appeal, and the finding of the Tax Court in ITC 1871 75 SATC 109, that the taxpayer could not make the input VAT deduction without the tax invoices contemplated in s16(2) of the VAT Act.
The High Court, sitting as a court of appeal, had to decide whether either the provisions of s20(7)(b) or s16(2)(f) of the VAT Act should have applied to allow the taxpayer an input VAT deduction.
Section 20(7)(b) of the VAT Act provides for exceptions with regard to the particulars which must appear on a tax invoice. This provision empowers SARS to direct that a tax invoice is not required to be issued if:
- there are sufficient records available to establish the particulars of any supply; and
- it would be impractical to require that a full tax invoice be issued.
While the High Court accepted that the sponsorship agreements contained sufficient records to establish the particulars of the supplies, it found that, it would not have been impractical to require the full tax invoice to be issued.
It was therefore left to the taxpayer to argue that s16(2)(f) of the VAT Act applied, which states the following:
No deduction of input tax in respect of a supply of goods or services, the importation of any goods into the Republic or any other deduction shall be made in terms of this Act, unless – the vendor, in any other case, is in possession of documentary proof, as is acceptable to the Commissioner, substantiating the vendor's entitlement to the deduction at the time a return in respect of the deduction is furnished.
The Court thus had to decide whether the contents of the sponsorship agreement should be regarded as a reliable source of documentary proof. Binns-Ward J held at para 15 that:
it is evident that the Commissioner predicated his calculation of the output tax on the information provided in the contracts. The appellant’s contention is that the contracts also serve as proof of its entitlement to a deduction for input tax. In my judgment the contention is well-made. If the documents were good enough for the Commissioner to assess the appellant’s output tax liability, it is impossible to conceive, having regard to the character of the particular transactions, why they should not also have been sufficient for the purpose of computing the input tax which should have been deemed to have been levied by the sponsors. The appellant had invoked the provisions of s16(2)(f) in its representations to the Commissioner. In the circumstances he was bound to take them into account in making the assessment. I do not think that the Commissioner could reasonably have decided that the information in the contracts did not in the circumstances provide sufficient proof substantiating the appellant's entitlement to the deductions claimed.
Thus, having assessed the taxpayer for output VAT in terms of the sponsorship agreements, the High Court held that the agreements were also sufficient documentary proof of the taxpayer’s entitlement to input VAT, which should have been levied by the Sponsors.
It should however be appreciated that the findings in this case are particular to the barter transactions concluded between the taxpayer and the Sponsors. Section 16(2)f) of the VAT Act does not as such provide a fall-back position for all vendors that are not in possession of a valid tax invoice.