Sars’s argument based on ‘conflated interpretation’ of the act.
Businesses that offer loyalty, cash-back or fee-reduction programmes should take note of a recent Tax Court judgment regarding value-added tax (Vat) input adjustments.
The taxpayer, a commercial bank, won its appeal against a decision by the South African Revenue Service (Sars) to disallow its Vat input deductions of more than R5.5 million.
The court found that the bank had complied with the jurisdictional and administrative requirements of the Vat Act.
Judge Petrus van Niekerk ordered Sars to alter the additional assessments to allow for the deduction of the claimed amount.
The matter stems from an audit letter and additional Vat assessments issued by Sars in October 2022 related to the input Vat deductions claimed by the bank for the period August 2020 to July 2021.
The offer to clients
The bank introduced a scheme where the client could have their service fee on a transactional account waived or reduced if certain criteria were met. This included using other products offered by the group such as a credit facility or a personal loan, and the account being kept in good standing.
The bank would charge Vat on the total banking fee and account for it, but would claim input Vat deductions when an amount was credited to the client’s account.
Charles de Wet, tax executive at ENS, explains that if the client’s account fees were R300 the bank would charge R45 Vat.
When the client received a rebate of R200 on the fee, the bank claimed R30 input Vat and paid R15 to Sars.
Sars allows Vat deduction
Sars disallowed this deduction. The disallowance happened in October 2022 and the bank objected in the same month. More than seven months later (1 June 2023) Sars disallowed the objection.
The bank submitted a notice of appeal nine days after that, and Sars filed its grounds of assessment on 31 January the following year.
The appeal before the Tax Court was only concluded in March this year.
The question
Cliffe Dekker Hofmeyr tax director Gerhard Badenhorst says the court had to consider whether the bank could rely on a specific provision in the Vat Act to claim the Vat deduction on the amount by which the banking fees were reduced.
The section – Section 21(1)(c) – applies when the previously agreed consideration for a supply has been altered by an agreement with the recipient, whether due to the offer of a discount or for “any other reason”.
De Wet says the judgment confirms that the deduction mechanism is available whenever a previously agreed consideration (in this case bank service fees) is reduced by agreement, regardless of the commercial motivation.
“Conditional reductions – where the discount depends on a client meeting certain criteria – remain reductions. They do not create a separate supply by the client. There is no prescribed time limit between the original supply and the alteration event.”
The evidence
The bank called its head of pricing and rewards as its only witness.
He testified that the cash-back scheme was introduced as a strategy to increase and protect the bank’s market share.
A competitor was offering very competitive banking service fees.
In terms of the agreement between the bank and its clients in this matter, the cash-back scheme was marketed as a means for clients to reduce their banking fees in total or in part.
According to the judgment, it initially appeared that Sars was under the incorrect impression about the electronic-cash benefit the bank offered to its clients.
In its statement of grounds of assessment and opposing the appeal Sars said the crediting of the accounts did not constitute a “credit note event”.
In essence, the dispute relates to whether the crediting of service fees previously debited by the bank against its clients’ accounts in terms of the cash-back scheme triggers the specific deduction mechanism in the act.
The service
Sars argued that the credit of the service fee into the client’s account served as a payment to the client because they had complied with the criteria – they joined the electronic-cash scheme, had a personal loan as well as a transactional account, and their account was in good standing.
It argued that this involved two different transactions.
“In my view the argument advanced on behalf of Sars … is an argument based on a conflated interpretation of various unrelated sections of the Vat Act,” Judge Van Niekerk found.
Badenhorst says the court clarified that the requirement to trigger the section was simply that the previously agreed consideration for the service (banking fees) must be altered by agreement with the recipient (client). “This can happen either due to the offer of a discount or any other reason.”
De Wet agrees. “The interpretation is now wider. The cashback or reduction does not have to be in relation to the original service – it can be for any other reason, such as making use of a credit facility and keeping an account in good standing.”
Badenhorst is hopeful that the judgment will now put an end to Sars’s ongoing attempts to disallow Vat deductions on discounts or rebates on the basis that they do not comprise a credit note event.
This article was republished from Moneyweb. Read the original here.