VAT a sore point that can lead to legal battles
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.