<\/p>\n
The fine line between supplying a service to the state and receiving grant funding is critical in determining the correct value-added tax (Vat) treatment \u2013 and misjudging it can be extremely costly.<\/p>\n
A welfare organisation is paying the price for getting it wrong, nearly 20 years after the fact. The courts have confirmed assessments from the South African Revenue Service (Sars) for the 2006 to 2015 period.<\/p>\n
Read:<\/p>\n
The matter between Sars and a non-profit company referred to as SLGGM centred on when funding from a public authority qualifies as a zero-rated grant, and when it is regarded as payment for taxable services at a standard rate.<\/p>\n
The company entered into a memorandum of agreement with the Gauteng Department of Education (GDE) in 2006 to improve the quality of education in schools through better management and governance skills.<\/p>\n
In March 2015, Sars assessed the company for the nine-year period and:<\/p>\n
ENSafrica Vat specialist Charles de Wet says a concerning issue is the time it took to get a decision in this matter.<\/p>\n
Despite the five-year prescription period for Vat, the assessment was only made after nine years \u2013 and the final decision only came in 2025.<\/p>\n
Welfare organisation<\/strong><\/p>\n SLGGM objected to the assessments, arguing that it is a welfare organisation and the money it received was a grant as defined in the Vat Act, hence it should be zero-rated.<\/p>\n Sars stood by its assessments, arguing that the company was not a welfare organisation and that the funding received from the department was payment for \u201cactual supplies\u201d, therefore attracting Vat at the standard rate.<\/p>\n SLGGM appealed to the Johannesburg Tax Court.<\/p>\n The court noted that the definition of a grant in the act explicitly excludes \u201cany payment made for the supply of any goods or services to the public authority or municipality making the payment\u201d.<\/p>\n ADVERTISEMENT<\/p>\n CONTINUE READING BELOW<\/p>\n<\/div>\n<\/div>\n The core of the dispute therefore turned on the nature of the payment, whether it was a gratuitous or unrequited transfer of funds, or a quid pro quo for services supplied\u00a0to the department.<\/p>\n<\/blockquote>\n The company placed stringent reliance on Section 8(5A) of the\u00a0Vat Act,\u00a0<\/span>which deems certain grants to be supplies. However, this section only applies if the payment is first established to be a grant. If the payment is for actual services, Section 8(5A) is not applicable, the court stated.<\/p>\n Read: Five reasons you should use a registered tax practitioner<\/p>\n Webber Wentzel tax partner Joon Chong remarks that the appellant\u2019s reliance on Section 8(5A) was misplaced.<\/p>\n \u201cOne must first establish that the payment legally qualifies as a grant before the deeming provision can operate. The court was correct to insist on this sequencing,\u201d she says.<\/p>\n The evidence <\/strong><\/p>\n The CEO of SLGGM testified that the company submitted invoices to the department to process grant funding payments which included a R5 million annual transfer for its operational costs.<\/p>\n The department was not obliged to pay the invoice amount, but the CEO, referred to as Mr A, did not deny that the itemised invoices were prepared to comply with procurement requirement.<\/p>\n Chong notes that the invoices were the fatal point in the chain of evidence.<\/p>\n<\/blockquote>\n \u201cOne does not invoice for a grant; one invoices for services. The presence of itemised billing was treated as clear objective proof of consideration for services rendered.\u201d<\/p>\n The court found the evidence of the CEO to be \u201cevasive, repetitive, and fundamentally lacking in credibility\u201d.<\/p>\n Read: Vat-registered schools set for rude \u2018wake-up call\u2019<\/p>\n ADVERTISEMENT:<\/p>\n CONTINUE READING BELOW<\/p>\n<\/div>\n<\/div>\n In the judgment, his testimony was characterised as a \u201crepeated refrain\u201d that was obstructive and designed to avoid conceding points that were plainly evident from the documents.<\/p>\n Chong notes that the credibility findings are significant for any taxpayer litigating on Vat characterisation. In this matter contradictions between oral testimony and organisational records undermined the appellant\u2019s case, especially those authored or approved by the CEO himself.<\/p>\n \u201cThe court readily preferred documents over disputed recollections,\u201d she adds.<\/p>\n \u2018Fine line\u2019 calls for vigilance<\/strong><\/p>\n De Wet warns that organisations must be vigilant not to cross the \u201cfine line\u201d between rendering a service for consideration and legitimately receiving a subsidy or grant where no quid pro quo is expected.<\/p>\n \u201cIn the welfare environment it should be seen in the context of receiving a subsidy or grant for no identifiable benefit. This can be difficult to determine, and people tend to interpret it rather widely.\u201d<\/p>\n Read: However, the playing field just got a little narrower with this judgment, says De Wet.<\/p>\n The court\u2019s point is that even if both entities pursue the same public-interest educational objectives, the Vat characterisation of the payment depends on the legal relationship, not the constitutional alignment of their goals, Chong adds.<\/p>\n \u201cSLGGM was a service provider reporting to its client, the GDE. It was not an independent entity using grant funding for its own purposes,\u201d she says.<\/p>\n The court dismissed the appeal, confirmed the assessments, and ordered the company to pay a 10% penalty on late payments, but no understatement penalty.<\/p>\n Follow Moneyweb\u2019s in-depth finance and business news on WhatsApp here.<\/em><\/p>\n<\/p><\/div>\n\n
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Overhaul of Vat system could slash rate to 6%
Any Vat increases in near future \u2018off the table\u2019<\/p>\n