Page 807 - SAIT Compendium 2016 Volume1

CASE DIGEST 2014-2015
Facts
The taxpayers specialises in the sinking of shafts and the development of underground structures used for mining and hydropower purposes. When tendering for certain contracts, the taxpayer included the estimated cost of meals and accommodation in its contract price on which output VAT was charged.
The taxpayer employs limited duration contract employees who are only employed for a speci c project undertaken by the Taxpayer. Given the fact that the taxpayer 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 sec 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 taxpayer for the limited duration contract employees constituted ‘entertainment’ as de ned in sec 1 of the VAT Act. SARS disallowed the taxpayer input vat deduction on the basis that such deduction is prohibited by section 17(2) (a) of the VAT Act.
The taxpayer argued 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. The taxpayer further contended that the contract employees preferred not to stay at the hostel and also made reference to the quality and quantity of the food.
In a nutshell the taxpayers’ argument is that within the context of this matter the provision of food and accommodation to the taxpayers’ employees should not be construed to be entertainment because there is no personal enjoyment by the taxpayer. Therefore “the provision of any food, beverages or accommodation” should also be restricted to that which results in personal enjoyment.
SARS did not dispute that the accommodation and food were not luxurious, but conceded that it was adequate. SARS further submitted that the reason the employees were leaving the accommodation camp is because of the increase in living out allowance which bene tted them.
Outcome
The Tax Court held in favour of SARS. The provision of food and accommodation provided by C Entity to the taxpayers’ employees constitutes ‘entertainment’ as de ned in section 1 of the VAT Act and that the deduction of input tax is therefore explicitly denied in terms of sec 17(2)(a) of the VAT Act.
Core reasoning
Acting Judge Mali (with all sitting assessors concurring) held 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.
Further, the Judge held that it will be impractical, unnecessary and tedious exercise to typify food and accommodation as either luxurious or adequate before same is classi ed as entertainment. After all, 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.
The court also nd no problems with the interpretation of the applicable section of the Act that may warrant a resort to other canons of interpretation and the de nition of the word “entertainment” is not ambiguous. In addition, the Court held that none of the provisos to section 17(2)(a) of the VAT Act are applicable (even though this did not form part of the taxpayers’ argument).
SAIT CompendIum oF TAx LegISLATIon VoLume 1 799
CASE DIGEST 2014-2015