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VAT Case Law: 1015: Whether the taxpayer was entitled to deduct input tax in respect of accommodatio


The taxpayer objected to the VAT assessments because certain input tax claims were disallowed.

The taxpayer is a company that specialises in the sinking of shafts and the development of underground structure, used in mining and hydropower applications. The taxpayer’s principal place of business is Johannesburg.

Certain of the taxpayer’s contracts for work in its areas of specialisation are obtained through open tender processes. When tendering for contracts, the appellant includes its estimated costs for accommodation and meals requirements for its workforce. Its contract price therefore includes accommodation and meals costs. The taxpayer then charges output tax on the contract price.

For purposes of servicing its clients, mostly mines, the taxpayer employs limited duration contract employees who are employed for a specific project undertaken

by the taxpayer The majority of the limited duration contract employees are

foreign nationals mainly Mozambique and Lesotho citizens.

During the periods of assessment, the taxpayer provided accommodation and

meals for its workforce. However, the taxpayer did not have its own accommodation facilities, and it contracted with third parties (including C entity) to provide hostel accommodation and meals for its employees at or close to the mines where the employees were deployed to carry out the construction activities of the taxpayer. The hostel owners, who are VAT vendors, duly invoiced the taxpayer an agreed fee and charged VAT thereon for provision of accommodation and meals to the appellant’s employees, for the duration of the contract.

The contesting issue – disallowed input tax claims relating to the basic provision of accommodation and meals

SARS disallowed the taxpayer’s input tax deductions relating to accommodation and meals expenses incurred by the taxpayer when executing its contracts at various mines. SARS disallowed the taxpayer’s input vat deduction on the basis that such deduction is prohibited by section 17(2)(a) of the Act.

The battlefield of the parties in this appeal is whether the provision of hostel accommodation and catering services obtained by the taxpayer for the limited duration contract employees at C Entity where they stayed; constitute “entertainment” as defined in the VAT Act.

The taxpayer argued in court that employees were provided basic accommodation and food. In addition, two Human Resource Managers testified, on behalf of the taxpayer, that the food and accommodation were not luxurious. As a result the contract employees prefer to not stay at a hostel, for among other reasons, lack of privacy, sharing of small rooms by two employees and the preference of employees to cook their

own meals. They further testified that there are other complaints in respect of the quality and quantity of food, poor lighting and broken taps. The taxpayer further referred the court to the photographs taken of the accommodation camps built by C Entity and food consumed by the employees which the input tax claimed is based. The purpose of the photographs was to persuade the court that the food and hostel accommodation were as basic as ever.

The taxpayer is in agreement with the fact that the definition of the word “entertainment” includes provision of food and accommodation; however the taxpayer sought to argue that the food and the accommodation it provided to its employees were not intended for personal enjoyment; as envisaged in section 17(2) of the VAT Act.

SARS did not dispute that the accommodation and food were not luxurious, but conceded that it was adequate. The taxpayer further submitted that the reason the employees were leaving the accommodation camp is because of the increase in living out allowance which benefitted them.

Briefly then the taxpayer’s argument is that within the context of this matter the provision of food and accommodation to the taxpayer’s employee should not be construed to be “entertainment” because there is no personal enjoyment by the appellant. Therefore “the provision of any food, beverages or accommodation” should also be restricted to that which results in personal enjoyment.

The court verdict - conclusion

`Entertainment’ in the VAT Act is defined as ` the provision of any food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind by a vendor whether directly or indirectly to anyone in connection with an enterprise carried on by him’

Meanwhile section 17 (2) (a) of the VAT Act is explicit that input tax claimed in respect of `entertainment’ expenses is not permissible. Section 17 (2) (a) reads as follows:

Notwithstanding anything in this Act to the contrary, a vendor, shall not be entitled to deduct from the sum of the amounts of output tax and refunds contemplated in section 16(3), any amount of input tax -

(a) in respect of goods or services acquired by such vendor to the extent that such goods or services are acquired for the purposes of entertainment: Provided that this paragraph shall not apply where -

(i) such goods or services are acquired by the vendor for making taxable supplies of entertainment in the ordinary course of an enterprise which -

(aa) continuously or regularly supplies entertainment to clients or customers (other than in the circumstances contemplated in item (bb)) for a consideration to the extent that such taxable supplies of entertainment are made for a charge which -

(A) covers all direct and indirect costs of such entertainment; or

(B) is equal to the open market value of such supply of entertainment,

The Judge argued that the legislature intentionally prohibited input tax relating to the provision of food and accommodation as entertainment expenses without categorising the type of food and accommodation as being luxurious or adequate. It will be impractical, unnecessary and tedious exercise to typify food and accommodation as either luxurious or adequate before same is classified as entertainment. It is not for the court to run wide imaginations as to the type of food and accommodation that may be considered luxurious and therefore exempted from the prohibition as deductible input tax therefore the input tax levied on them is not deductible.

The Judge was uncompromising that the definition of the word “entertainment” as the VAT Act is not ambiguous.

The Judge of the Gauteng Tax Court held the view that the taxpayer’s provision of food and accommodation to its contract employees as constituting `entertainment’ as envisaged in the Act and is therefore not deductible as input tax.

By South African Institute of Professional Accountants

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