CASE SUMMARY: CAPITEC BANK LIMITED V C:SARS (2024) ZACC 1

This case places itself within the Value Added Tax ("VAT") realm and involves the Constitutional Court ("CC") determining whether a supply free of charge may constitute a taxable supply. More specifically, in respect of section 16(3)(c) of the Value Added Tax Act 89 of 1992 ("VAT Act") and whether the supply of an insurance contract to borrowers who pay interest and fees made exclusively in the course or furtherance of an exempt activity constitutes a taxable supply. Further, whether the amount in section 16(3)(c) may be apportioned where the insurance contract is supplied only partly in the course or furtherance of an enterprise. Furthermore, the significance of a taxpayer's failure to plead apportionment.

Foremost, the Court determined that lending money is the "supply" of "services" within the wide definition of those terms in the VAT Act. Within this context, the CC considered the definitions of a "taxable supply", an "enterprise", "consideration", an "exempt supply", and the supply of "financial services".

If acquired supplies are used by a vendor for taxable and exempt supplies, the amount of VAT on those supplies deductible as input tax requires an apportionment of the VAT, as per section 17 of the VAT Act.

Lending money to customer's is part of Capitec's business. When Capitec lends money, it charges interest and initiation and service fees. Generally, Capitec's activity of lending money to unsecured borrowers is an exempt financial service to the extent of the interest it charges. The same activity, however, is the carrying on of an "enterprise" in which taxable supplies chargeable with tax under section 7(1)(a) are supplied, to the extent of the fees Capitec charges. Consequently, Capitec does not charge VAT on interest and does not claim input tax deductions attributable to the charging of interest, whereas it does charge VAT on the fees it levies, and it claims input tax deductions attributable to the charging of fees.

Capitec deducted R71,520,812 in calculating its VAT return for November 2017 which constituted the amount Capitec paid to customers as loan cover. SARS disallowed the deduction which gave rise to an Additional Assessment. Capitec objected to such Additional Assessment which SARS disallowed and consequently resulted to an Appeal to the Tax Court.

When arriving at its decision, the Constitutional Court considered the following:

• The relevance and VAT treatment of the policies issued by the insurers;
• Whether the loan cover was provided free of charge;
  • The CC found that the loan cover was provided free of charge.
• Whether a free-of-charge supply is disqualified from being a "taxable supply";
  • The CC considered section 10(23) of the VAT Act which provides that "where any supply is made for no consideration the value of that supply shall be deemed to be nil".
  • Capitec's supply of the loan cover was not disqualified from being a "taxable supply" merely because it was supplied free of charge.
• Whether the loan cover was supplied exclusively in the course or furtherance of an exempt activity;
  • The CC found that the loan cover was a mixed supply made in the course and furtherance of Capitec's exempt activity of lending money for interest and its enterprise activity of lending money for fees.
  • This is a single activity of lending money for consideration which consisted of both interest and fees.
  • The proviso to section 2(1) compels one to treat the single activity as consisting of two notional components, the one an exempt activity and the other an "enterprise" activity.
• The capitalisation of fees;
  • The question to be answered, in this regard, is whether, in terms of section 16(3)(c), the supply of the loan cover to borrowers was a taxable supply.
  • The Court found that unpaid fees debited by Capitec to borrowers' accounts do not lose their character as fees, any more than the debited interest loses its character as interest.
  • "Capitalised" interest is therefore still interest for the purposes of the in duplum rule.
• The extent of the deduction permitted by section 16(3)(c) and apportionment.
  • With regards to apportionment, the Court had to determine whether Capitec's failure to plead apportionment should result in Capitec being deprived of any deduction at all.
  • The CC referred the matter back to SARS but did however state that Capitec sought a deduction in full and thus SARS should have responded that it would permit a partial deduction and was incorrect in disallowing the deduction in full.

The Court ordered that the orders of the Tax Court and Supreme Court of Appeal be set aside and that the assessment for Capitec’s November 2017 VAT period be remitted to SARS for examination and assessment in accordance with the principles set out in the judgement.

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