NAVIGATING COMPLEXITIES - A CASE STUDY ON VAT DEDUCTIONS FOR UNIVERSITIES IN SOUTH AFRICA

Introduction

Section 41B of the Value Added Tax Act 89 of 1991 (the VAT Act) empowers the South African Revenue Service (SARS) to issue a VAT class ruling upon receiving such an application. These class rulings provide clarifications on how the Commissioner would interpret and apply the provisions of the laws relating to a specific proposed transaction to a specific class of persons.

These class rulings are therefore only binding on SARS and the specific class of persons to whom it relates and does not constitute a practice prevailing. Third parties are therefore not allowed to rely on a class ruling under any circumstances.

Applying for a class ruling is an intricate and complex process, which often requires legal input and guidance. The nuances attached to these applications are apparent from the recent judgement of TUUP v CSARS.¹

The case deals with the challenges faced by institutions providing both taxable and exempt supplies. It delves into the complicated nature of VAT deductions, particularly concerning shared inputs and the contentious issue of the 12.5% cap on input tax deductions imposed by a class ruling. This article aims to summarise the fundamental findings having regard to the legal framework of the case and the respective arguments.

Legal Landscape

The crux of the matter lies in section 17(1) of the VAT Act. As per the VAT Act, VAT vendors can deduct input tax on goods and services for making taxable supplies, but not for non-taxable supplies. Universities provide both taxable (e.g., commercial research) and exempt supplies (e.g., educational services), creating a challenge in determining the VAT deduction on shared inputs. As such, section 17(1) of the VAT Act allows SARS to determine the ratio of goods and services used for taxable versus non-taxable supplies.

The Birth of the Class Ruling

In 2011, and to address the complexities faced by universities, Higher Education South Africa (HESA) sought a section 17 class ruling from SARS. This ruling, known as "The VCR" (Value-Added Tax Class Ruling), established a formula and a 12.5% cap for input VAT deductions for universities. The ruling aimed to provide a fair and equitable method for determining the ratio of goods and services used for taxable versus non-taxable supplies.

The Contested Case

Fast forward to the present case, where TUUP (the Taxpayer) disputed SARS's decision not to deviate from the class ruling regarding a land lease agreement with a developer for a student residence. The dispute hinges on whether the purpose of the agreement is deemed taxable or exempt, which would ultimately influence the Taxpayer's entitlement to input tax deductions.

Challenges to the Class Ruling

The Taxpayer not only challenged SARS's decision on the specific agreement but also sought to challenge the class ruling of 2011 by questioning the lawfulness of the 12.5% cap in the class ruling. The court found that the Taxpayer failed to properly plead an attack on the ruling, and even if it had, the agreements with the Developer were deemed to provide exempt supplies, denying the Taxpayer input tax deductions.

Section 17(1) and the Apportionment Ratio

A crucial aspect of the case revolves around Section 17(1) and its application in determining the apportionment ratio for input tax deductions. The court highlights the flexibility granted to SARS in determining the ratio and issues related to intended use for taxable versus non-taxable supplies. Whilst SARS’s flexibility is an important factor to consider when making these applications or lodging these challenges, it must be noted that the discretion of any SARS official is subject to the principles of administrative justice, and where applicable, subject to the provisions of the Promotion of Administrative Justice Act.²

The Head Lease and Sub-Lease Conundrum

A significant component of the case involves the Taxpayer's attempt to include VAT incurred under a Head Lease in the apportionment calculation, challenging SARS's refusal and the 12.5% cap. The court rejects this argument, emphasizing the interconnected nature of the agreements and their collective purpose of providing exempt supplies, specifically student accommodation.

Conclusion

In conclusion, the case highlights the intricacies of VAT deductions for universities engaged in both taxable and exempt supplies. The court's decision supports SARS's position on the 12.5% cap, emphasizing the need for proper pleading and rejecting attempts to segregate interconnected agreements, and SARS’s wider discretionary powers in this regard. This case serves as a valuable precedent in navigating the complex terrain of VAT regulations for educational institutions in South Africa.

1. Case No: VAT 22402.
2. The Promotion of Administrative Justice Act 3 of 2000.

Intellectual property disclaimer:
The contents of any article published by Pieterse Sellner Erasmus should not be construed as professional legal advice.