The fundamental governing principle of value-added tax (VAT) is that it is levied on the supply of goods and services by a vendor, and that the vendor can claim input tax in respect of goods and services received. It can be difficult enough dealing with the administrative aspects of VAT and determining the correct VAT treatment of transactions – imagine the additional frustration created when the South African Revenue Service (SARS) assesses a vendor for VAT on supplies made, but then denies the vendor the right to claim input VAT as a result of a failure to comply with certain substantive and procedural requirements imposed under the Value-Added Tax Act No. 89 of 1991 (the VAT Act).
In a Tax Court judgment (as yet unreported, Case No VAT 872) the facts were that a vendor provided services to certain sponsors (also VAT vendors) and in return the sponsors gave money and services to the taxpayer. Essentially, the parties engaged in barter transactions. The vendor had failed to account for output tax in respect of the supplies made to the sponsors. Also, despite numerous requests by the vendor, the sponsors failed to issue tax invoices to the vendor for the supplies that the sponsors had made to the vendor.
SARS assessed the vendor in respect of output tax on the supplies made to the sponsors, but denied the vendor an input tax claim in respect of the supplies that the sponsors made to the vendor on the grounds that no output tax was actually charged by the sponsors and the vendor was not in possession of tax invoices. The vendor conceded that it was liable to account for the output tax, but insisted that it should be allowed to claim input tax against such output. The vendor also insisted that SARS should force the sponsors to provide it with tax invoices for this purpose.
Yekiso J, in giving judgment:
- Considered the submission by SARS that the sponsors, rightly or wrongly, did not charge VAT, and accordingly there was no ‘input tax’ (as defined) that could be claimed.
- Noted that the vendor did not submit that it was charged any VAT by the sponsors or that it paid input tax to the sponsors.
- Held that the reason the vendor cannot deduct input tax is because it did not have the required tax invoices.
- Held that, in circumstances such as the present where a tax invoice cannot be obtained, the vendor should have created a document deemed to be a tax invoice in terms of section 20(2) of the VAT Act, or it should have obtained a court order compelling the sponsors to provide it with tax invoices;
- Held that the vendor could not ask for an order compelling SARS to force the sponsors to provide tax invoices because the vendor itself did not comply with the VAT Act in that it failed to account for output tax.
- Held that the vendor could not make use of section 20(7)(b) of the VAT Act, which provides that the Commissioner of SARS may exercise a discretion to not require a tax invoice where sufficient records are available to establish the particulars of any supply or category of supplies, because there was a “contentious mix of supplies and the category of supplies received is uncertain”.
The court confirmed SARS’s assessment and dismissed the vendor’s submissions.
Considering the facts, the question should be asked: what was the mischief? The value of the supplies made by each party to the other, and therefore the consideration and output VAT in respect of each supply, was equivalent. The input tax claim of each party would have equalled its output tax liability. For all intents and purposes, it should have been a VAT neutral transaction.
Section 64(1) of the VAT Act which deals with prices charged by the vendor provides that “any price charged by any vendor … shall be deemed to include any tax payable in terms of section 7(1)(a) in respect of such supply, whether or not the vendor has included tax in such price”. Both parties were registered VAT vendors, and accordingly both parties were deemed to have charged VAT. It must follow that they are both also deemed to have paid VAT. The fact that the transaction was a barter transaction and not a money transaction should not make any difference.
Where a vendor sells something for R114 and no reference is made to VAT being charged, the R114 is deemed to include VAT. It is submitted that this is no different from a barter transaction.
In other words, it is irrelevant whether the quid pro quo is given in cash or in kind. The definition of consideration in the VAT Act provides that consideration includes any payment whether in money or otherwise and may also take the form of any act or ‘forbearance’ (that is, failure to act). When the consideration is in kind, the open market value of the goods or service received as consideration will be taken into account. For example, where a company sponsors an event by supplying sport equipment in exchange for advertising, the consideration for the advertising services would be the market value of the sport equipment.
In other words, whether a person receives money or goods and services makes no difference as the vendor is still deemed to have charged VAT. In terms of the judgment, the judge was correct in that the taxpayer did not have a tax invoice, but this does not detract from the fact that, on an overall application of the policy underlying the VAT Act, the taxpayer should be in a tax neutral position and there was no loss to the fiscus.
The judgment is correct to the extent that without the tax invoice the taxpayer was not entitled to the input tax deduction. However, the suggestion in the judgment that the vendor could have made use of section 20(2) (recipient generated invoices) as a remedy is, with respect, incorrect. The vendor would not have been able to meet the prescribed requirements in circumstances where both SARS and the sponsors were not being cooperative. The requirements include prior approval by the Commissioner of SARS as well as an agreement with the sponsors that they would not issue tax invoices.
It is interesting to note that in considering section 20(7), the judgment failed to consider the section in its entirety and made reference to only the “category of supplies” and not the fact that the VAT Act refers to (the particulars of any supply or category of supplies…). When one considers section 20(7) it seems clear that the reference to ‘categories’ is to standard rated supplies, zero-rated and exempt supplies, as opposed to any other category or type of goods or services supplied. On the facts, all the supplies were taxable supplies. Even if it was not clear whether the supplies were that of goods or services or any other category, it would have made no difference in this particular case.
The reasoning of this judgment has put the proverbial (judicial) cat amongst the (VAT) pigeons. It is understood that the matter is to go on appeal and we keenly await the outcome.