VAT status of payments to welfare organisations clarified by the High Court

vat 1Author: Gerhard Badenhorst (Tax Executive at ENSAfrica)

The SA Red Cross Air Mercy Service Trust (“the Trust”) approached the High Court for a declaratory order regarding the value added tax (“VAT”) status of payments it receives from the health departments of provincial governments to provide air rescue services as and when required. In its judgment delivered on 6 May 2015, the High Court found in favour of the Trust that the payments qualify for VAT at the rate of zero per cent.

It was common cause that the Trust is a welfare organization and that its activities constitute welfare activities, being the rescue or care of persons in distress.

The Trust applied for a declaratory order following a ruling issued by the South African Revenue Service (“SARS”) that the payments received by the Trust are in respect of actual services rendered to the provincial governments, and are therefore subject to VAT at 14 per cent.

The High Court was approached to provide clarity on the application of two sections of the Value-Added Tax Act, 1991 (“the VAT Act”), i.e. section 8(5) and section 11(2)(n). Section 8(5) provides that a designated entity (which includes a welfare organization) is deemed to supply services to a public authority to the extent of any payment made by the public authority to the designated entity in the course or furtherance of an enterprise carried on by the designated entity. Section 11(2)(n) provides for the zero rating of services supplied by a welfare organization comprising of welfare activities, and to the extent that any payment for those services fall within section 8(5), the services are deemed to be supplied to a public authority.

The Trust contended that the provisions of section 8(5) of the VAT Act are applicable to any payments it received from the provincial governments, and that the payments received qualify for the rate of zero per cent in terms of section 11(2)(n) of the VAT Act because they related to the Trust’s welfare activities.

Counsel for SARS argued that section 8(5) only applies to gratuitous payments made by a public authority and not to payments for actual services supplied, and therefore the payments made by the provincial governments fall outside the scope of section 8(5). Counsel for SARS further argued that the gateway into section 11(2)(n) is section 8(5), and because the provisions of section 8(5) do not apply, the zero rating provisions of section 11(2)(n) cannot apply.

In applying the principles of statutory interpretation as enunciated in various authorities, the High Court found that the wording of the two sections are quite clear when the ordinary meaning of the words therein are examined in the context of the VAT Act. No additional purposive approach is required as there is no ambiguous or unclear words in these sections, and the words are clear as they stand.

The High Court could therefore not agree with the SARS argument that section 8(5) does not deal with actual services. It agreed with the Trust that the purpose of the deeming provision in section 8(5) is simply to deem the payments received to be consideration for ‘services’ as opposed to ‘goods’.

The High Court found that the zero rating provisions of section 11(2)(n) applies because the services rendered by the Trust comprise ‘welfare activities’, and that such services are deemed to be supplied to the provincial governments.

The High Court therefore granted the declaratory order sought by the Trust that section 8(5) applies not only to services deemed to be rendered by also to actual services rendered, and that the payments received by the Trust from the provincial governments for these services are subject to VAT at the rate of zero per cent. SARS was ordered to pay the cost of the application.

It remains to be seen whether SARS will accept the judgment or whether it will lodge an appeal against the judgment to the Supreme Court of Appeal.