Page 783 - SAIT Compendium 2016 Volume1

CASE DIGEST 2013–2014
On this basis the court concluded that the taxpayer had acted reasonable as he did in fact take advice from specialists. The court found that the behaviours applied by SARS were therefore not applicable but there was, at most, a substantial understatement as it was common cause that the relevant understatement fell within that de nition. The court, however, found that the taxpayer had no extenuating circumstances and would not be entitled to further remittance under s 270 (6D).
In respect of the interest levied in terms of s 89quat, the court held that sub-s. (3) provides the Commissioner with a discretion and that based on the nding of the reasonableness of the taxpayer’s actions, such interest should also be remitted..
The taxpayer’s appeal against the assessment was dismissed, the understatement penalty was reduced to 10 per cent and the interest was remitted in full on the basis that his actions, based on the facts, were reasonable.
27. TC-VAT 1015 SG (29 September 2014)
Introduction
This case is an appeal against Value-Added Tax assessments raised in terms of s 31 of the Value-Added Tax Act 89 of 1991 (hereinafter ‘VAT Act’) by SARS (hereinafter ‘respondent’) for the appellant company’s VAT periods from 12/2007 to 12/2009 on the basis that accommodation and meals provided to the appellant’s limited duration contract employees when working on certain projects are ‘entertainment’ as de ned in s 1 of the VAT Act and that the input tax thereon are therefore speci cally denied in terms of s 17 (2) (a) of the VAT Act.
Facts
The appellant’s principal place of business is in Johannesburg and it specialises in the sinking of shafts and the development of underground structures used for mining and hydropower purposes. When tendering for certain contracts, the appellant included the estimated cost of meals and accommodation in its contract price on which output tax was charged.
The appellant employs limited duration contract employees who are only employed for a speci c project undertaken by the appellant. Given the fact that the appellant does not have its own accommodation facilities it contracted with third parties to provide hostel accommodation and meals to its employees at a location on or near the mines. These third parties charged output tax in terms of s 7 (1) (a) of the VAT Act on the supply of the accommodation and meals. The only issue before the Tax Court was whether the provision of the hostel accommodation and catering services obtained by the appellant for the limited duration contract employees constituted ‘entertainment’ as de ned in s 1 of the VAT Act.
‘Entertainment’ is de ned in s 1 of the VAT Act as follow (own emphasis):
‘means 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’.
It should be noted that s 17 (2) (a) of the VAT Act explicitly denies an input tax deduction to the extent that that goods and services were acquired by the vendor for purposes of entertainment and states the following:
‘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 s 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 ...’
At para [15] of the judgment, Mali AJ stated the following with regards to the rational of s 17 (2) (a) of the VAT Act
(own emphasis):
‘The purpose of the legislature in enacting the prohibition of input tax in terms of section 17 (2) (a) of the Act is inter alia to avoid granting a deduction of input tax where the ‘entertainment’ in question involves a strong element of personal enjoyment, especially in circumstances where there is room for abuse.’
The appellant called two Human Resource Managers to testify that the food and accommodation were not luxurious as there was a lack of privacy because rooms were shared among employees, the lighting was poor and the taps were broken. They further testi ed that the contract employees preferred not to stay at the hostel and also made reference to the quality and quantity of the food. This was done by the appellant in an attempt to persuade the Tax Court that the food and accommodation provided to the contract employees were not intended for personal enjoyment. The respondent did not dispute the fact that the food and accommodation were not luxurious but it did concede that it was adequate.
The appellant heavily relied on the fact that the de nition of ‘entertainment’ should be considered within the context in which it occurs in the VAT Act by making reference to C:SARS v Dunblane (Pty) Ltd C, Hoban v Absa Bank Ltd t/a United Bank and Others 1999 (2) SA 1036 (SCA) and R v Secretary of State for the Home Department [2001] 3 All ER 433 (JL). This was done in an attempt to argue that the provision of food and accommodation to the appellant’s employees should not be construed to be ‘entertainment’ because there is no personal enjoyment by the appellant and that the provision of any food beverages or accommodation should also be restricted to that which results in personal enjoyment.
Held
The Tax Court held that none of the provisos to s 17 (2) (a) of the VAT Act are applicable (even though this did not form part of the appellant’s argument). Mali AJ stated the following at paras [24] – [26] (own emphasis):
SAIT CompendIum oF TAx LegISLATIon VoLume 1 775
CASE DIGEST 2013-2014