Value-added Tax and entertainment

It is well-established that, in terms of section 17(2)(a) of the Value-added Tax Act, No 89 of 1991 (VAT Act), a vendor is not entitled to deduct any amount of input tax in respect of goods or services acquired for the purposes of 'entertainment', unless certain exceptions apply.

The Tax Court recently gave judgment in the case of AB (Pty) Ltd v Commissioner for the South African Revenue Service (case no 1015, as yet unreported) concerning input tax deductions and entertainment expenses.

The appellant was a registered vendor that provided services in the mining industry, such as the sinking of shafts and other construction work. The fact that the services usually had to be rendered at mining sites, and that many of the appellant’s employees were not from South Africa, meant that the appellant had to provide accommodation and meals for its employees while working on particular projects.

The appellant generally outsourced the provision of the said accommodation and meals by contracting with third parties operating close to the relevant mines (in this matter a particular third party). The third party was a registered vendor and levied Value-added Tax (VAT) in respect of the supply of the accommodation and meals.

The appellant claimed input tax deductions in respect of the VAT paid on the accommodation and meals. However, the South African Revenue Service (SARS) subsequently raised assessments against the appellant, disallowing the input tax deductions on the basis that accommodation and meals constitute 'entertainment'. The appellant objected, but SARS disallowed the objection, and the appellant appealed to the Tax Court.

The term 'entertainments is defined in s1 of the VAT Act as meaning “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”.

The court seemed to accept that the purpose of s17(2)(a) of the VAT Act is to prohibit input tax deductions where the supply “…involves a strong element of personal enjoyment, especially in circumstances where there is room for abuse”.

The appellant’s argument was essentially that, under the circumstances in question, the provision of the accommodation and meals should not be construed as 'entertainment' because there was no personal enjoyment by the appellant. Also, the employees only received basic food and accommodation and there was no intention of providing personal enjoyment. The mischief that the VAT Act intended to address by prohibiting the deduction of input tax was accordingly not present in the appellant’s circumstances. A restrictive interpretation should therefore apply in respect of s17(2) of the VAT Act.

The court found the appellant’s arguments to be without merit because, in the court’s view, the legislature could not have intended for the provision of accommodation and meals to be categorised into basic or luxurious, and to so determine whether it should be exempt from the prohibition (presumably on the basis that luxury accommodation or meals would imply that there is an element of personal enjoyment).

The court further argued that the term 'entertainment' is defined and is unambiguous. It is clear that meals and accommodation are included in that term, and there is no problem with that interpretation that would warrant “a resort to other cannons of interpretation”, presumably a purposive and restrictive interpretation.

Without elaborating on the details, the court also found that none of the exceptions to the prohibition in s17(2)(a) of the VAT Act applied.