SARS wins R71.5m tax case against Capitec – here’s why

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SARS ultimately won its bid to deny Capitec the R71.5 million VAT return demanded in 2017.

  • The Supreme Court of Appeal upheld SARS’ November 2017 VAT filing decision against Capitec.
  • SARS denied Capitec the tax deduction related to loan cover proceeds Capitec received from its insurers.
  • The tax collector argued that the bank wanted input tax deductions without any corresponding output tax.

The South African Revenue Service (SARS) ultimately won its bid to deny Capitec the R71.5 million VAT return demanded in 2017.

The tax collector and the bank have had a long contentious battle since SARS barred Capitec from claiming the R71.5 million tax deduction when filing its VAT return in November 2017. SARS also imposed a 10% late penalty for the bank’s understatement. subject to VAT at the time.

Initially, the Cape Town Tax Court ruled in favor of Capitec, saying the bank was entitled to deduct this amount from its VAT liability. But SARS took the case to the Supreme Court of Appeal (SCA) and the court in Bloemfontein upheld on Tuesday that the tax collector’s assessment was correct.

The background

Capitec claimed an input tax deduction related to its unsecured lending business. When issuing personal loans to its customers, Capitec would provide those customers with an insurance policy, or “loan cover”, that would settle the customers’ debt in the event of death or layoff.

These policies have been underwritten by Guardrisk since May 1, 2015. Previously, loan cover was underwritten by Channel Life Insurance. And because Capitec insured against the unpaid amount, it suffered no credit loss when those policies paid out.

During the 2014/15 VAT period, the bank received payments worth R582.4 million. Capitec claimed R71.5 million as a deduction, which was the tax portion of the total insurance payments.

On February 15, 2018, SARS issued a VAT assessment which rejected it on the grounds that Capitec was not eligible for a deduction under Section 16(3)(c) of the VAT Act . It was then that he also levied a 10% late penalty for what he considered to be an understatement of Capitec’s VAT debt at the time.

SARS was of the view that the loan cover payments were not eligible for an input tax deduction because they were provided as part of Capitec’s business of providing credit to its customers, and that the bank had not charged a separate fee for loan cover. It was therefore an “exempt supply” and not a “taxable supply”.

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On the other hand, Capitec argued that although it did not charge a separate fee for its loan cover, the loan cover was an integral part of its unsecured lending business and generated both interest income and commission income. He said the cost of covering the loan was recovered from this income.

Since Capitec’s customers benefited from the free loan cover, it argued that the provision of such cover did not constitute a “business” within the meaning of the VAT law. It was therefore not taxable under the law. The VAT law requires businesses participating in the VAT system to charge a fee for the goods or services they supply.

Capitec maintained that there was only one true ordinary insurance contract, that between Capitec and its insurers, Channel and Guardrisk. The advantage for Capitec customers whose loans were settled by these insurers in the event of death or retrenchment was only incidental.

What the SCA said

The SCA pointed out that Guardrisk pays a downstream tax on the premiums it collects from Capitec. She was also granted a fictitious tax deduction in respect of her payment settlement that she paid to Capitec.

In the case of Capitec, the bank also benefited from an input tax deduction on the premiums it paid to Guardrisk. Thus, when Guardrisk paid the loan cover claims to the bank, Capitec had to pay a downstream tax on these products. The deduction of input tax and output tax had to be taken into account.

“However, Capitec wishes to treat this same deemed supply as a new notional input tax deduction. If this is the case, Capitec’s books will be skewed, as it would result in input tax deductions without any corresponding output tax,” , Judge Halima Khanam Saldulker wrote in the judgment delivered on Tuesday.

Saldulker added that SARS pointed out that because the supply of the loan cover to Capitec customers was not a “taxable supply” within the meaning of the VAT law, the tax portion of the loan cover payments does not did not give rise to a deduction either.

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