The issue before the court in Milner Street Properties (Pty) Ltd v Eckstein Properties (Pty) Ltd [2001] ZASCA 95 was whether an agreement that was intended by the parties to be a zero-rated VAT disposal from one VAT vendor to another of an enterprise as a going concern but which failed to satisfy the formal requirements imposed by section 11(1)(e) of the Value-Added Tax Act 89 of 1991 could be rectified, with retrospective effect, so as to satisfy those requirements.
In this regard, section 11 of the VAT Act provides as follows –
Zero rating.—(1) Where, but for this section, a supply of goods would be charged with tax at [14%], such supply of goods shall, subject to compliance with subsection (3) of this section, be charged with tax at the rate of zero per cent where—
[. . .](e) the supply is to a registered vendor of an enterprise or of a part of an enterprise which is capable of separate operation, where the supplier and the recipient have agreed in writing that such enterprise or part, as the case may be, is disposed of as a going concern: Provided that—
(i) such enterprise or part, as the case may be, shall not be disposed of as a going concern unless—
(aa) such supplier and such recipient have, at the time of the conclusion of the agreement for the disposal of the enterprise or part, as the case may be, agreed in writing that such enterprise or part, as the case may be, will be an income-earning activity on the date of transfer thereof; and
(bb) the assets which are necessary for carrying on such enterprise or part, as the case may be, are disposed of by such supplier to such recipient; and
(cc) in respect of supplies on or after 1 January 2000, such supplier and such recipient have at the time of the conclusion of the agreement for the disposal of such enterprise or part, as the case may be, agreed in writing that the consideration agreed upon for that supply is inclusive of tax at the rate of zero per cent;
The necessity to satisfy the statutory formal requirements
In order to satisfy these requirements, it does not suffice that the subject of the disposal was in fact an income-earning enterprise as at the date of transfer. The formal requirements imposed by these provisions must also be satisfied – in other words, the agreement must be expressed in the form required by the Act.
The need to satisfy the formal requirements is reiterated by SARS in its publication entitled VAT 404, which summarises the requirements of the VAT Act in this regard as follows:
It must be clearly evident, and stated in the wording of the written agreement that –
- the enterprise is sold as a going concern;
- the business is or will be an income-earning activity on the date of transfer;
- the whole business or a part of it which is capable of separate operation is disposed of to the purchaser, including all the assets necessary for carrying on the enterprise or part thereof; and
- •the consideration includes VAT at the rate of 0%.
Where any of the above requirements are not met, the supply of the enterprise will be subject to VAT at the standard rate of 14%. [Emphasis added.]
Rectification of a non-compliant agreement
In Milner Street Properties the court said (at para [26]) that an agreement that is void for lack of compliance with the applicable statutory formalities – in other words, where non-compliance with the applicable statutory formalities renders an agreement a complete nullity – it cannot be salvaged by rectification, for there is nothing to be rectified.
By contrast, said the court (at para [26]), in the present case, compliance with the formalities prescribed by the Act was not a prerequisite for the conclusion of a valid agreement, but merely impacted on the fiscal consequences of the agreement, namely the rate at which VAT was to be levied.
In his judgment, Nienaber J said (at paras [29] and [31]) that there was no reason in principle why rectification should not be granted in the present case, because–
The purpose of rectification in circumstances such as the present is not to avoid the payment of a tax which would otherwise be due to the Commissioner. Nothing would prevent the Commissioner, even if the document should be rectified, from going behind its terms to determine for himself whether the supply of the goods was to be charged with VAT at zero per cent.
The court held that the agreement in the present case was capable of retrospective rectification
Nienaber J concluded (at para [33]) that –
There are accordingly in my opinion no obstacles, legal or factual, to allowing the respondent to meet the appellant’s case by a plea of rectification. Rectification, once granted, operates ex tunc, as if the document at its inception read as it has now been reconstructed to read. Rectification does not alter the terms of the agreement, it perfects the written memorial so as to accord with what the parties actually had in mind.