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

SARS has finally won its bid to deny Capitec the R71.5 million VAT return it claimed back in 2017.

SARS has finally won its bid to deny Capitec the R71.5 million VAT return it claimed back in 2017. Capitec

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

The South African Revenue Service (SARS) has finally won its bid to deny Capitec the R71.5 million VAT return it claimed back in 2017.

The tax collector and the bank have had a long litigious battle since SARS disallowed Capitec from claiming the R71.5 million tax deduction when it filed its VAT return in November 2017. SARS also levied a 10% late payment penalty for the understatement of the bank’s VAT liability at the time.

Initially, the Tax Court in Cape Town ruled in Capitec’s favour, saying that the bank was entitled to deduct this amount from its VAT liability. But SARS took the matter to the Supreme Court of Appeal (SCA) and the Bloemfontein-based court confirmed 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 provided those customers with an insurance policy, or “loan cover”, which would settle the customers’ debt in the event of death or retrenchment.

These policies were underwritten by Guardrisk from 1 May 2015. Before that, the loan cover was underwritten by Channel Life Insurance. And because Capitec insured itself against the unpaid amount, it did not suffer any credit loss when these policies paid out.

During the 2014/15 VAT period, the bank received payouts to the value of R582.4 million. Capitec claimed R71.5 million as a deduction, which constituted the tax fraction of the total insurance payouts.

On 15 February 2018, SARS issued a VAT assessment which disallowed it on the basis that Capitec did not qualify for a deduction in terms of section 16(3)(c) of the VAT Act. That’s when it also levied a 10% late payment penalty for what it deemed an understatement of Capitec’s VAT liability at the time.

SARS’s view was that the loan cover payments did not qualify for an input tax deduction because it was supplied in the course of Capitec’s business of providing credit to its customers, and the bank did not charge a separate fee for the loan cover. So, it was an “exempt supply” and not a “taxable supply”.

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On the other hand, Capitec argued that even though it did not charge a distinct fee for its loan cover, the loan cover was integral to its unsecured lending business, and in generating both interest income and fee income. It said the cost of providing the loan cover was recovered through that income.

Since Capitec customers received the loan cover free of charge, it argued that the supply of such cover did not qualify as an “enterprise” as envisaged under the VAT Act. It was therefore not chargeable with tax under the law. The VAT Act requires that enterprises participating in the VAT system must charge a fee for the goods or services they supply.

Capitec maintained that there was only one real ordinary insurance contract, the one between Capitec and its insurers, Channel and Guardrisk. The benefit to 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 paid output tax on the premiums it collected from Capitec. It was also allowed a notional tax deduction in respect of its payout settlement that it paid to Capitec.

In Capitec’s case, the bank was also allowed an input tax deduction in respect of the premiums it paid to Guardrisk. So, when Guardrisk paid out the loan cover claims to the bank, Capitec was required to pay output tax on those proceeds. Both the input tax deduction and the output tax had to be accounted for.

“However, Capitec wants to treat that same deemed supply as a new notional input tax deduction. If it does so, this will leave the books of Capitec skewed, as this would result in there being deductions of input tax without any corresponding output tax,” wrote Judge Halima Khanam Saldulker in the judgment handed down on Tuesday.

Saldulker added that SARS pointed out that because the supply of the loan cover to Capitec customers was not a “taxable supply” in terms of the VAT Act, the tax fraction of the loan cover payouts did not qualify for a deduction either.