This tax case is an Appeal to the Tax Court of South Africa against a decision by the Tax Board. It is in respect of whether supplies made by the appellant can be considered to be exempt in terms of section 2(1) of the VAT Act.
ABC Trading applied to SARS to be deregistered as a VAT vendor. It appears that the reason that the appellant requested to be deregistered is that it considered itself to be in the business of providing financial services as stipulated in section 2(1)(i) of the Value-Added Tax Act, Act 89 of 1991 (“the VAT Act”). SARS rejected the application stating that “…the company is not providing insurance under a long-term insurance contract but only acts as an administrator for the insurance company…” Subsequent to an unsuccessful objection and appeal to the Tax Board, ABC Trading approached the Tax court for relief. The Tax Court held that the ABC Trading’s “…business does not fall within the deeming provision of a “financial service” for purposes of section 2(1)(i) of the VAT Act.
ABC Trading applied to SARS to be deregistered as a VAT vendor on 31 October 2016. On 6 June 2017 SARS responded as follows:
“From the information supplied it seems if the company is not providing insurance under a long-term insurance contract but only acts as an administrator for the insurance company. For these services the company is charging an administrative fee that is subject to VAT in terms of section 7(1)(a) of the VAT Act. The company’s turnover also exceeds the minimum threshold for compulsory registration in terms of section 23(1) – and does not qualify to cancel their VAT registration in terms of section 24(1) of the VAT Act…Your request for deregistration cannot be granted at this time…”
The main business of ABC Trading is “…administering funeral policies on behalf of a long-term insurer… Its business involves negotiating policies on behalf of the insurer; collecting these premiums and paying them over to the insurer; submitting detailed monthly collection reports; and processing claims by beneficiaries.” In return for providing these services, ABC Trading receives administration fees from the insurer.
Following an unsuccessful objection and appeal to the Tax Board, ABC Trading approached the Tax court for relief.
The core issue is whether ABC Trading is in the business of providing financial services in accordance with section 2 of the VAT Act and consequently is making exempt supplies and therefore entitled to VAT deregistration in terms of section 24 of the VAT Act.
It was argued that administration services rendered by ABC Trading to the insurer in terms of the contractual agreement between the two parties constitute a financial service in terms of section 2 of the VAT Act.
ABC Trading argued that the services rendered to the insurer qualifies as a deemed financial service since the proviso to section 2(1) of the VAT Act does not refer to section 2(1)(i). Furthermore it was argued, “…by necessary implication the legislature intended that the fees earned by it (and other enterprises conducting similar services) fall outside the exclusions in that proviso, and are therefore exempt in terms of section 12 of the VAT Act.”
There was a fundamental flaw to the argument presented by ABC Trading. The respondent stated that “…the determining factor is rather whether or not the appellant’s business constitutes the ‘provision of a long-term insurance policy’ in terms of section 2(1)(i). If not, the proviso becomes irrelevant.”
Based on the above findings, the court held that “…the agreement makes it clear that the services performed by appellant [ABC Trading] are purely administrative ones for which it is paid a fee. It does not provide a long-term insurance policy. The insurer does that.” Accordingly, ABC Trading’s “…business does not fall within the deeming provision of a “financial service” for purposes of section 2(1)(i) of the VAT Act.”
The taxpayer’s appeal is dismissed, and no order is made as to costs as it was considered appropriate that each party pays its own costs.
Find a copy of the court case here.