After court confirms payments were services …
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 – and misjudging it can be extremely costly.
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.
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.
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.
In March 2015, Sars assessed the company for the nine-year period and:
- Raised additional assessments of R93 million;
- Understatement penalties of R18 million; and
- Late payment penalties of R9 million.
ENSafrica Vat specialist Charles de Wet says a concerning issue is the time it took to get a decision in this matter.
Despite the five-year prescription period for Vat, the assessment was only made after nine years – and the final decision only came in 2025.
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Welfare organisation
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.
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 “actual supplies”, therefore attracting Vat at the standard rate.
SLGGM appealed to the Johannesburg Tax Court.
The court noted that the definition of a grant in the act explicitly excludes “any payment made for the supply of any goods or services to the public authority or municipality making the payment”.
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 to the department.
The company placed stringent reliance on Section 8(5A) of the Vat Act, 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.
Webber Wentzel tax partner Joon Chong remarks that the appellant’s reliance on Section 8(5A) was misplaced.
“One 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,” she says.
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The evidence
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.
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.
Chong notes that the invoices were the fatal point in the chain of evidence.
“One 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.”
The court found the evidence of the CEO to be “evasive, repetitive, and fundamentally lacking in credibility”.
In the judgment, his testimony was characterised as a “repeated refrain” that was obstructive and designed to avoid conceding points that were plainly evident from the documents.
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’s case, especially those authored or approved by the CEO himself.
“The court readily preferred documents over disputed recollections,” she adds.
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‘Fine line’ calls for vigilance
De Wet warns that organisations must be vigilant not to cross the “fine line” between rendering a service for consideration and legitimately receiving a subsidy or grant where no quid pro quo is expected.
“In 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.”
However, the playing field just got a little narrower with this judgment, says De Wet.
The court’s 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.
“SLGGM was a service provider reporting to its client, the GDE. It was not an independent entity using grant funding for its own purposes,” she says.
The court dismissed the appeal, confirmed the assessments, and ordered the company to pay a 10% penalty on late payments, but no understatement penalty.
This article was republished from Moneyweb. Read the original here.
