Tax Court faults SARS in R158m VAT case over legal insurance fund

Posted on Leave a comment

Value-added tax keeps making the news. If it’s not a rate hike that gets people irate, it’s the disallowance of their legitimate input tax claims that forces them into litigation with the South African Revenue Service.

A recent case before the Western Cape Tax Court shows that it helps if taxpayers stand up for their rights. The court ordered SARS to set aside additional VAT assessments of close to R158 million.

The taxpayer, a fund set up in terms of the Attorneys Act and the Legal Practice Act (LPA), claimed input VAT over four periods between 2018 and 2020. SARS initially paid the tax for the first two periods.

However, following an audit, it reversed the payments and disallowed the claims for the other two periods. The fund’s objection was rejected, and it lodged an appeal against SARS’s decision.

The fund was set up to reimburse members of the public when they suffer “pecuniary loss” as a result of theft by legal practitioners of money or property placed in trust. The fund collects contributions from practitioners, obtains group professional indemnity insurance cover for them, and pays the premiums on their behalf.

Agent vs principal

SARS argued the insurer did not offer a service to the fund, but to the practitioners. The fund was merely acting as an agent and therefore this “tripartite” arrangement did not create a basis for the fund to claim input tax. There was also no documentary proof from the fund for the services it supplied to the practitioners.

The fund pointed out that it did supply a service to the practitioners. It contracted with the insurer and paid the premiums on behalf of the practitioners, who received their fidelity fund certificates in exchange for these services.

“The contributions paid to the fund by the practitioners constituted consideration for the services supplied by the fund,” the fund argued in court papers.

The court found it was “common cause” that the fund had contracted with the insurance provider and paid the premiums, including VAT, to the insurer.

The court disagreed with SARS’s submission that the fund acted as an agent and only arranged the indemnity insurance on behalf of the practitioner, who acted as the principal.

“The applicable provisions of the Attorneys Act and the LPA empowering the board of the fund to enter into the contract of insurance do not bear out the principal-agency arrangement. Quite the opposite. They rather affirm that the intention of the legislator was that the fund enter into the contract of insurance as principal,” the judge wrote in his decision.

He added there was no suggestion in the language of any of the provisions in the two relevant Acts that the fund was empowered or required to enter the contracts as an agent for the practitioners.

“On the facts and evidence before the court, the court is satisfied that the contract of insurance was concluded between the fund and the insurer as principals, and that SARS’s agency argument to the contrary must fail, not least because the conclusion of the contract in that manner has always been, and still is, SARS’s pleaded case.”

Documentary proof

Another issue ventilated before the court was the fact that the fund did not furnish SARS with any invoices that the insurer issued to it at the time of submitting the returns.

SARS argued that the fund was thus prohibited from claiming the input tax deduction. A witness for the fund testified that the insurer issued invoices to the fund for all payments it received from the fund.

“SARS had not adduced any evidence to contradict this, nor had it made any allegations in its rule 31 statement (new grounds in the SARS statement of grounds of assessment and opposing appeal) or its heads of argument to suggest otherwise,” the judge said.

The court also noted that although the fund did not discover or provide copies of the invoices received from the insurer, it was not enough reason to penalise the fund. It also did not mean that the fund failed to discharge the burden of proof it bore.

The court emphasised that the obligation rests on SARS to indicate clearly what matters and which documents are in dispute. “Any other approach would make litigation in the Tax Court unmanageable, as the taxpayer would be left in the dark as to the level of detail required of it in the presentation of its case.”

Micaela Paschini, the head of tax legal at Tax Consulting SA, says the court’s decision reinforces key principles around the relationship between contracting parties, the making of taxable supplies, and claiming input tax.

“When VAT-registered entities procure services as part of their taxable supplies, and comply substantively with the VAT Act, they are entitled to input tax relief,” she added in a statement.

Click here to download the judgment.

Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article is a general guide and should not be used as a substitute for professional tax advice.

 

Leave a Reply

Your email address will not be published. Required fields are marked *