A recent Supreme Court of Appeal (SCA) ruling should deliver a stark warning to businesses claiming input Value Added Tax (VAT) deductions without a watertight legal foundation.
In Aveng Mining Shafts & Underground v CSARS (1192/2023) [2025] ZASCA 20, the SCA sided with South African Revenue Service (SARS) and disallowed almost R17.5 million in VAT input claims. These claims related to employee accommodation and food expenses.
This case underscores the dangers of assuming VAT deductibility without expert guidance. It became an expensive lesson that cost the taxpayer not only millions in disallowed claims but also substantial legal fees.
With SARS boasting an 86% litigation win rate – reported in its Tax Statistics for the 2023/24 year of assessment – businesses must tread carefully. Otherwise, they risk costly defeats in court.
Risky VAT claims – the dispute is in the details
In this dispute, the taxpayer claimed R17,495,071.81 worth of input VAT deductions between June 2012 and August 2016 under the Value Added Tax Act, No. 89 of 1991 (the Act). These input VAT deductions related to ‘entertainment expenses’.
Specifically, the expenses included accommodation and food provided to certain employees deployed to fixed-term mine construction projects.
It was common cause that ‘entertainment expenses’ broadly include the provision of food, beverages and accommodation. However, section 17(2)(a) of the Act excludes input VAT deductions for ‘entertainment expenses’ – except under certain limited exceptions.
The SCA had to consider three key issues:
- Whether the taxpayer’s expenditure on accommodation and food fell within the exception under section 17(2)(a)(i)(bb) of the Act. This section permits deductions only when entertainment is supplied to employees for a charge that covers all direct and indirect costs.
- Whether the ‘entertainment expenses’ were involved as part of the taxpayer’s ordinary course of business in producing taxable supplies of entertainment, as required under section 17(2)(a)(i).
- Whether the ‘entertainment expenses’ were incurred for employees who were “away from their usual place of work”. This condition might have made the expenses deductible under section 17(2)(a)(ii).
The taxpayer’s arguments
The taxpayer argued that the input VAT charged on accommodation and food expenditure should be deductible for three main reasons:
- The expenses were factored into tender pricing for the mining projects. Therefore, the taxpayer indirectly recovered them from its clients.
- Section 17(2)(a)(i)(bb) allowed for deductions when ‘entertainment expenses’ were charged to employees, or when the employer covered all direct and indirect costs.
- Businesses should not bear VAT input costs where they make taxable supplies, as VAT operates under the so-called neutrality principle.
SARS’ arguments
SARS countered that the taxpayer’s claims were flawed on multiple fronts:
- SARS pointed out that the expenses for food and accommodation clearly fell within the definition of “entertainment expenses” under the Act. These are expressly excluded from input VAT deductions unless specific exceptions apply.
- SARS argued that the taxpayer was not engaged in the business of making taxable supplies of entertainment. Therefore, the claimed deductions did not qualify under the relevant provisions.
- SARS contended that the taxpayer did not directly charge employees for these costs. Moreover, the taxpayer failed to conclusively prove that its tender pricing fully covered all direct and indirect expenses related to food and accommodation.
- SARS emphasized that the neutrality principle could not override clear statutory prohibitions. It reinforced that the Act’s restrictions on entertainment deductions serve as a legislative safeguard against potential tax abuse.
The court’s ruling on claiming input VAT
In a sweeping loss, the SCA disagreed with the taxpayer’s arguments and dismissed its appeal with costs.
The court sided with SARS and found that the taxpayer’s enterprises did not involve making taxable supplies of entertainment. As a result, the claimed input VAT did not qualify under section 17(2)(a)(i).
Furthermore, the taxpayer failed to prove that it directly recouped the ‘entertainment expenses’ from employees. It also did not demonstrate that its tender pricing covered all direct and indirect entertainment costs.
Finally, the neutrality principle did not apply because the Act expressly prohibited input VAT deductions. The court affirmed that this prohibition was a clear legislative policy intended to prevent abuse of input VAT claims.
Legal merits or litigation?
South African tax laws are incredibly technical and nuanced. Therefore, correct interpretation and application by taxpayers is critical to avoid unexpected tax liabilities.
Similarly, taxpayers should avoid relying on overly aggressive tax advice from certain market advisors. Such advice could result in a very expensive lesson.
Given SARS’ successful litigation strategy and its high litigation win rate, taxpayers must act proactively. They should enlist the assistance of skilled tax advisors to carefully review and advise on the correct application of tax legislation. This should happen not only when disputing a matter, but from the outset. Doing so is vital to ensure correct substantive application of the law and overall tax compliance.
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Andre Daniels | Head | Tax Controversy and Dispute Resolution | mail me | |
Richan Schwellnus | Tax Attorney | mail me | |
