VAT a sore point that can lead to le­gal bat­tles

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Ferdie Sch­nei­der

It is im­per­a­tive to con­tract care­fully to avoid fu­ture dis­agree­ment over which party must pay the tax

THE Value Added Tax (VAT) Act de­ter­mines that the price charged by a ven­dor is deemed to in­clude VAT, whether or not the ven­dor has in­cluded VAT in the price or not (sec­tion 64).

The VAT Act also de­ter­mines that prices quoted or ad­ver­tised in­clude VAT (sec­tion 65). VAT in­clu­siv­ity or ex­clu­siv­ity has been the sub­ject of many a dis­pute in South African courts in the past.

In Strydom ver­sus Du­ven­hage NO and an­other the Supreme Court of Ap­peal handed down judg­ment on an agree­ment that was silent on VAT but de­ter­mined that the pur­chaser was li­able for trans­fer duty, where ap­pli­ca­ble. The court found that the pur­chase prices (of three farms) in­cluded VAT and the seller had to is­sue the re­cip­i­ent with a tax in­voice. The court also held, in ap­ply­ing the “by­stander test”, that although trans­fer duty is a form of tax, it could not be im­plied that a pur­chaser agree­ing to pay trans­fer duty would not ob­ject to pay­ing VAT in­stead as it was also a form of tax.

An­other case, Die Trus­tees van die San­tinia Trust ver­sus Beukes en ’n An­der, dealt with the re­cov­ery of VAT where the sup­plier of the goods or ser­vices was not a reg­is­tered ven­dor at the time when the con­tract was con­cluded but later be­came reg­is­tered for the tax. The sup­plier sought to re­cover VAT from the re­cip­i­ent on be­com­ing reg­is­tered for VAT. The court held that the sup­plier had the right to re­cover the VAT from the re­cip­i­ent un­der the VAT Act as it re­lied on the pro­vi­sions of the leg­is­la­tion in the form of sec­tion 67 and did not rely on the pro­vi­sions of the con­tract.

More re­cently, the Supreme Court of Ap­peal handed down judg­ment in Van Aardt ver­sus Gal­way. Messrs van Aardt and Gal­way were dairy farm­ers and own­ers of neigh­bour­ing farms. Gal­way and Van Aardt en­tered into a lease agree­ment in terms of which Gal­way leased his farm to Van Aardt. The lease agree­ment gave Van Aardt the op­tion to pur­chase the farm for R700 000. Van Aardt ex­er­cised the op­tion in a signed let­ter ad­dressed to Gal­way and a deed of sale for R700 000, in­clu­sive of VAT. Gal­way was no longer in­ter­ested in sell­ing his farm and Van Aardt ap­proached the high court un­suc­cess­fully and ap­pealed to the Supreme Court of Ap­peal. Gal­way ar­gued that the op­tion was not valid and, in any event, that the op­tion was not validly ex­er­cised. Gal­way ar­gued that the op­tion did not men­tion VAT in re­spect of the sales price, whereas the deed of sale recorded that the sales price was in­clu­sive of VAT. Gal­way ar­gued that if the terms con­tained in the op­tion were not con­sis­tent with the terms on which the op­tion was ex­er­cised it could not have been ex­er­cised validly. The court noted that, although Gal­way was a VAT ven­dor in re­spect of his dairy farm­ing busi­ness, it did not nec­es­sar­ily fol­low that the sale of the farm would be sub­ject to VAT as it would first have to be es­tab­lished whether the sale would be a sup­ply in the course and fur­ther­ance of an en­ter­prise in terms of sec­tion 7(1)(a) of the VAT Act. The court did not make a find­ing in this re­gard as the rel­e­vant facts were not be­fore it and it had to pro­ceed on the ba­sis that the sale may or may not have been sub­ject to VAT.

Van Aardt ar­gued that the op­tion de­noted a sales price of R700 000, which meant that no more and no less than R700 000 would be paid by the pur­chaser to the seller. Gal­way con­tended that it was ei­ther an im­plied or tacit term of the op­tion that the sales price would be ex­clu­sive of VAT and that, if there were to be a VAT li­a­bil­ity, it would be for Van Aardt’s ac­count. The court held that there could have been no term im­plied by law that the sales price was ex­clu­sive of VAT for the fol­low­ing rea­sons:

The VAT Act al­lows for trans­ac­tions to be con­cluded on a VAT in­clu­sive or ex­clu­sive ba­sis, sub­ject to the obli­ga­tion con­tained in sec­tion 65 that the price must be ad­ver­tised ac­cord­ingly.

Sec­tion 10(3)(a) of the VAT Act pro­vides that where the con­sid­er­a­tion for a sup­ply is an amount of money, the value of the sup­ply is that amount of money.

Where the VAT is not ac­counted for sep­a­rately and the sale is in­clu­sive of VAT, the VAT com­po­nent is the tax frac­tion of the con­sid­er­a­tion; and

Sec­tion 64(1) of the VAT Act con­tains a pre­sump­tion that a price charged by a ven­dor is in­clu­sive of VAT whether the ven­dor has in­cluded the tax or not. The court held fur­ther that there could have been no tacit term im­plied by the facts to the ef­fect that the sales price would be ex­clu­sive of VAT since:

As­sum­ing that the sale was not sub­ject to VAT and a hy­po­thet­i­cal by­stander asked the par­ties what they agreed to in re­spect of VAT, the an­swer would be that VAT was not payable and not that they agreed that should VAT be payable it would be for the pur­chaser’s ac­count;

As­sum­ing that the sale at­tracted VAT and a hy­po­thet­i­cal by­stander asked the par­ties what they agreed to in re­spect of VAT, Van Aardt would prob­a­bly not have agreed to pay tax in ad­di­tion to the R700 000, but would prob­a­bly have taken ad­vice or ne­go­ti­ated fur­ther; and

It is not nec­es­sary to im­pute such an in­ten­tion to the par­ties to lend busi­ness ef­fi­cacy to the agree­ment.

The court held that the op­tion was valid and was validly ex­er­cised. The terms of the deed of sale was con­sis­tent with the terms of the op­tion, not­with­stand­ing the fact that the one de­ter­mined VAT in­clu­siv­ity whereas the other was silent on VAT.

It can be seen that the ques­tion of VAT in­clu­siv­ity ver­sus VAT ex­clu­siv­ity can have a neg­a­tive ef­fect on the cost of a trans­ac­tion and it is there­fore im­per­a­tive to con­tract care­fully to avoid sub­se­quent le­gal bat­tles.

Ferdie Sch­nei­der is a tax part­ner at KPMG, spe­cial­is­ing in Value-added Tax.

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