VAT – Input tax and tax invoices

vat 1An attack by SARS backfired in an appeal in the Western Cape High Court when the Court delivered its judgment in South Atlantic Jazz Festival (Pty) Ltd v Commissioner for the South African Revenue Service [2015] ZAWCHC 8 (judgment delivered on 6 February 2015).

The facts
The appellant, a registered VAT vendor, had, for a number of years, been the organiser of an international jazz festival. In order to finance and facilitate the holding of the festival, it sought sponsorships from large enterprises. The enterprises undertook to provide cash, goods or services to an agreed value, in consideration for which they were given preferential advertising and branding rights. In the matter before the Court, the enterprises concerned were South African Airways, the City of Cape Town, Telkom and the South African Broadcasting Corporation.

In the course of an audit of the appellant’s tax affairs, SARS raised an assessment for value-added tax (VAT) by reason that the granting of rights to the enterprises constituted a taxable service which was subject to VAT. The appellant had not issued a tax invoice, and SARS accordingly determined the amount of the liability by reference to the value of goods and services that were to be supplied, as specified in the relevant sponsorship agreements.

The items stipulated in the sponsorship agreements were supplied to the Appellant, and the rights granted were exercised.

The appellant did not dispute that it was required to account for VAT, but contended that it had purchased goods and services from the sponsors to an agreed value and that, in the determination of its liability to VAT, it should be allowed a deduction for input tax in respect of the VAT on those supplies. It argued that the sponsorship agreements that were the source of the assessment should equally serve as the source for allowing a deduction for input tax.

SARS countered the appellant’s contention by holding that a deduction in respect of input tax may not be claimed unless the vendor is in possession of a valid tax invoice from the supplier. The appellant had repeatedly requested the issue of tax invoices from the sponsors but had not been provided with the tax invoices that it had requested. As the appellant was unable to produce valid tax invoices, the claim for deduction was disallowed.

After the appellant’s objection had been disallowed, it appealed to the Tax Court, which dismissed the appeal. The matter was then taken on appeal to the Full Bench of the Western Cape High Court.

The issue
The issue that the Court was called upon to adjudicate was whether the sponsorship contracts could be regarded as tax invoices.

Section 16(2)(a) of the Value-Added Tax Act 89 of 1991 (the VAT Act) sets out the basic principle governing the right to deduct input tax:

“(2) 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-
(a) a tax invoice or debit note or credit note in relation to that supply has been provided in accordance with section 20 or 21 and is held by the vendor making that deduction at the time that any return in respect of that supply is furnished….”

There follow a number of sub-items in (b) to (f) which specify circumstances where a document other than a tax invoice may be accepted by SARS in lieu of a tax invoice. Section 16(2)(f) of the VAT Act stated, at the relevant time:

“(2) 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 –

(f) 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 appellant urged that the sponsorship agreements, which had been the source from which SARS had determined the amount of VAT to be assessed, were documentary proof substantiating its entitlement to a deduction, and that the agreements should have been recognised as being acceptable.

SARS, in its Reasons for Assessment, had offered no explanation for its conduct, save to assert that the appellant was not in possession of the relevant tax invoices. No other reason was given, and the statement was not expanded upon.

The decision
The Court considered initially whether an alternative procedure might have been adopted by the appellant, for instance self-invoicing, as contemplated in section 20(7) of the VAT Act.  However, it found that this was appropriate only where there was sufficient documentary evidence available and it would be impractical to require that a full tax invoice be issued. In the circumstances, the Court was not persuaded that it was impractical to require that a full tax invoice be issued.

The Court had established, correctly, it is submitted, that the transaction was a barter transaction between persons dealing at arm’s length. Thus, it had stated (at paragraph [4] of the judgment):

“In an ordinary arms’ length barter transaction the value that the parties to it have attributed to the goods or supplies that are exchanged seems to me, in the absence of any contrary indication, to be a reliable indicator of their market value. It is thus plain that the value of the goods and services provided to the taxpayer by the sponsors was equally determinable from the sponsorship contracts.”

Binns-Ward J (who delivered the unanimous judgment of the Court) found it appropriate that the contents of the sponsorship agreements should be looked to as a reliable source of documentary proof. The learned Judge stated
(at para graph [15]):

“… [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 section 16(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.”

In short, the Commissioner was ‘hoist with his own petard’. Having insisted that the values set out in the sponsorship agreements were sufficiently reliable to establish the tax to be assessed on the taxpayer’s supplies to the sponsors, SARS could scarcely argue with conviction that the sponsorship agreements were not
acceptable documentary proof from which to identify the amount of input tax that could be claimed as a deduction in respect of the supplies received by the taxpayer from the sponsors – after all, there was a barter transaction, and it would be assumed, in the absence of contrary evidence, that the consideration given should reflect the value of the supply received.

The vigorous defence of its position by SARS rested on three main points.

First, it argued, the value of the services received from the sponsors had not been established. This was a new argument that had not been raised in any correspondence or in the pleadings and was summarily dismissed. The value of the supplies to the taxpayer had never been placed in issue in the proceedings. The Court was hasty to point out that SARS had been quite prepared to rely upon the information in the documents for its own purposes in assessing the appellant’s liability.

Secondly, SARS argued that the document should contain all of the information required to be reflected in a valid tax invoice, and that the sponsorship agreements did not meet this requirement.

Again the Court gave short shrift to this contention. If that were the case, said Binns-Ward J (at paragraph [20]), there would be no need for section 16(2)(f), which was intended to cover ‘other circumstances’. In any event the sponsors were known to SARS, who (the Court had noted at paragraph [4]) was aware that they had failed to supply tax invoices, despite being obliged to do so, and yet had made no attempt to compel the issuing of the tax invoices or prosecute the sponsors for their failure to respond to the appellant’s requests.

The third argument was an attack on the forum selected for resolution of the dispute. SARS argued that the process of appeal to the Tax Court was procedurally incompetent, in that the refusal to recognise the information in the sponsorship agreements as acceptable documentary proof was an administrative decision that could only be challenged on review to the High Court. Here the
Court found that the process was indeed an appeal against an assessment and not an application for review and setting aside of a decision under section 16(2)(f) of the VAT Act.

Appeal allowed
The appeal was accordingly allowed and the assessments were referred back to SARS for reconsideration.

VAT Act:  Section 16(2), 20 and 21