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Considering VAT on grants · Tax Break: South African tax for professionals

• 0:11
  If you think about that and grants, in other words, unearned
• 0:15
  payments that you receive, your instinct or gut feel would
• 0:18
  probably be that surely there could be no VAT on this.
• 0:22
  Now in today's episode of Tax Break, the podcast for South
• 0:25
  African tax professionals and practitioners are look at the
• 0:28
  case that illustrates that you have to be very careful.
• 0:32
  This is more complex than this topic of of grants is more
• 0:35
  complex than it would seem at first.
• 0:39
  Before I start, I would like to ask that if you like listening
• 0:42
  to the podcast, if you would mind writing it on your favorite
• 0:46
  podcast platform. So that gives the platform an
• 0:50
  indication of podcasts that are listened to and that they can
• 0:55
  recommend to other people. And it also if you if you would
• 1:00
  be so kind to share it with another person who also works in
• 1:03
  South African decks who may also be interested in becoming a
• 1:07
  regular listener. I've put my e-mail address in
• 1:09
  the notes. So if there's any
• 1:11
  correspondence, ideas, suggestions, questions, or if
• 1:14
  you need some tax advice, please send me an e-mail.
• 1:18
  Now let's get back to grants. And I think to start off, I
• 1:23
  would like to look at some of the elements of the structure of
• 1:27
  the VAT Act that relates to grants or grant type payments.
• 1:32
  So First things first, if we look at Section 1, so of course
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  Section 1 is the section of the VAT Act that contains all the
• 1:39
  definitions. There's a definition of a grant
• 1:42
  in Section 1. So that definition read it's an
• 1:45
  appropriation, a grant in aid, a subsidy or a contribution
• 1:52
  transfer granted or paid to a vendor by a public authority, a
• 1:57
  municipality or constitutional institution that's listed in the
• 2:02
  first general to the PFMA. The definition doesn't stop the
• 2:08
  IT. So it doesn't just say if you've
• 2:10
  got these types of payments by these types of entities, then it
• 2:14
  will definitely be a grant. It also has an exclusion which
• 2:19
  our few exclusions amongst others for payments made for
• 2:22
  goods and services do the entity making the payment to the
• 2:26
  vendor. So they there's a clear
• 2:30
  indication that if the payment is for goods and services, it
• 2:35
  can't be a grant. Now there's definition of a
• 2:38
  grant is then the relevance in the context of the VAT Act.
• 2:43
  It's linked to a deemed supply and Section 85-A, which in turn
• 2:48
  links to a 0 rating. That would apply if you've got a
• 2:52
  grant paid to a person to assist a person in carrying on an
• 2:57
  enterprise. And the purpose of the 0 rating
• 3:00
  is really to do not affect the person's entitlement to input
• 3:05
  tax in respect of costs incurred in the course of the enterprise.
• 3:09
  Just because there's been a grant inflow.
• 3:12
  Now it Coldwell be that you've got these payments coming from
• 3:16
  places that are or from from from persons that are not public
• 3:21
  authorities, municipalities or constitutional entities.
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  And in that case, you would have to arguably look at the the
• 3:30
  concepts of supply, the concepts of goods and services and the
• 3:35
  concept of consideration to guide you as to whether there
• 3:39
  should be of that on this payment or not.
• 3:43
  And I think the the presence or the absence of goods and
• 3:46
  services is critical in making this determination.
• 3:50
  So let's now turn to the court case.
• 3:53
  And as I've said, this case illustrates some of the
• 3:57
  complexities that may be involved as soon as you start
• 4:00
  working with grants. So the case is the VAT 1543
• 4:05
  case. It was it be in in the
• 4:09
  Johannesburg Tax Court before and the judge was Judge Molly.
• 4:15
  Now let's have a look at the some of the key facts.
• 4:18
  The tax payer is a non profit company as well as a public
• 4:23
  benefit organisation, so A/B 0. It's also a welfare
• 4:28
  organisation, so that adds a little bit more complexity from
• 4:31
  that perspective because there are also some deemed supply
• 4:34
  rules and 0 rating specifically for welfare organisations.
• 4:40
  The tax payer was incorporated in 2002 and it was established
• 4:46
  to research, develop and deliver capacity building programs in
• 4:51
  school management, leadership, school governance, teacher
• 4:55
  development for schools, including schools in the Harting
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  Province. And what the judgment also tells
• 5:03
  us is that the GDE, the charting Department of Education was a
• 5:07
  founding member of this tax payer.
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  So what then happened? The GD E paid grants to the tax
• 5:15
  payer and the tax payer received these grants from the GDE,
• 5:19
  didn't account for VAT on them and such contained it that these
• 5:24
  were not were in fact not grants, they were considerations
• 5:28
  for actual supplies. Sartain went back for nine
• 5:32
  years, so for the period 2006 to 2015.
• 5:36
  So I think the reality is that that's a long time to go to go
• 5:40
  back. And the the case shows us that
• 5:45
  then if you've been doing it incorrectly for such a long
• 5:48
  time, your risk is quite significant.
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  So the tax involved 93,000,000 Rand and the penalties was
• 5:55
  another 18,000,000. What the judgment doesn't tell
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  us especially and given the long period involved, I would guess
• 6:03
  that there was also a substantial amount of interest
• 6:05
  involved in or payable by the tax payer.
• 6:09
  So you probably had a non profit company sitting with a tax bill
• 6:14
  of I would guess well in excess of 150 million.
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  So a few further important facts about that that could then that
• 6:24
  that the court considered in considering whether such was
• 6:28
  such his position was was correct or not.
• 6:31
  They will say, well, you concluded between the parties
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  and the EU had a clause that basically stated that the tax
• 6:38
  payer was appointed as the first option service provider in
• 6:42
  relation to the provision or the programs to improve the quality
• 6:48
  of education in schools through the transformation of education
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  in the Harting province by improving school management and
• 6:57
  governance skills. So the difficult thing here is
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  that the term service provider already creates the perception
• 7:06
  that maybe this maybe it's not just a payment for, for no
• 7:15
  consideration or for no, for no, no, no performance process wise.
• 7:21
  What's important here is that the tax payer applied for grants
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  and the GDE was free. It had the discretion to award
• 7:31
  the grant or not. But very important, once the
• 7:35
  grant was awarded, it was paid via an invoice or paid for an
• 7:40
  invoice issued by the tax payer. And this invoice had to comply
• 7:44
  with the procurement requirements of the department.
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  So the court's discussion shows us that the core of the dispute
• 7:52
  was really what's the nature of these payments?
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  OHH. Were these payments gratuitous
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  or unrequited transfers of funds?
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  Or was there a quid pro quo where the tax payer really
• 8:06
  rendered services to the to the, to the department?
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  The court's view was that the evidence clearly showed that
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  there was a quid pro quo required.
• 8:18
  So as they described it, they viewed it as the department
• 8:22
  really paying the the tax payer to act as it's as its training
• 8:27
  delivery arm and to perform these capacity building
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  functions for their department. The court also stated that the
• 8:36
  fact that the ultimate beneficiaries of the the, the
• 8:41
  the work or the activities of the tax payer were the teachers
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  and the learners and who were basically within.
• 8:50
  So it was it was part of a function that the GDPR had to do
• 8:54
  as to to fulfill its public duties.
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  That didn't alter the fact that the tax payer was still a
• 9:00
  service provider to the department.
• 9:03
  So the court doubt that the tax payer the the department
• 9:07
  received direct and substantial value in return for these
• 9:11
  payments. And the language used in the
• 9:15
  agreement to the MOU made it clear that we were looking at a
• 9:19
  principal agent relationship, not a benefactor grant recipient
• 9:24
  type of relationship. So the court found that the tax
• 9:27
  payer failed to discharge the burden of proving that these
• 9:30
  payments were not subject to that and that the the tax bill
• 9:35
  therefore stood. So what can you possibly take
• 9:38
  home from this? I think two things in my mind.
• 9:41
  The first one is when it comes to grants, be careful.
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  Be very, very careful. There's a complex, if you want
• 9:48
  to see how complex it is, go and have a look at interpretation
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  note 39 that's such issued. It's a good resource to it.
• 9:56
  It goes through the history of how the legislation developed
• 10:00
  and it is a resource that as soon as you start reading it,
• 10:04
  you, you'll see the complexity in these provisions.
• 10:08
  I think the second thing take home is that if you want to go
• 10:11
  to the core of are you looking at something that that should
• 10:15
  have that or not, It really comes down to the question as to
• 10:19
  whether goods or services are being supplied or not.
• 10:22
  So those core concepts in the VAT Act, they are also relevant
• 10:26
  there. I want to remind you, as always
• 10:29
  that nothing in this podcast is intended to be tax advice.
• 10:33
  The podcast is only for information purposes.
• 10:36
  That's that for today. So I will speak to you again
• 10:40
  next week. Goodbye.