In a significant win for taxpayers on the South African Revenue Service’s (SARS) “narrow” approach to the ability to claim input Value-Added Tax (VAT), the Supreme Court of Appeal (SCA) recently ruled in favour of Woolworths Holdings (Woolworths), the group holding company, affirming its right to claim over R8 million in input VAT.
The decision, handed down on Friday, 4 July 2025, not only spares Woolworths millions, but is also a significant development regarding the claiming of input VAT where the issue of a taxpayer’s enterprise activities is under consideration.
SCA clarifies input VAT rules amid SARS’ narrow interpretation
This comes at a time when many taxpayers are facing SARS audits and revised assessments seeking to claw back VAT refunds, sometimes on the basis that no genuine enterprise exists.
The Woolworths VAT win case signals that SARS cannot cherry-pick transactions in isolation. Courts will look holistically at a taxpayer’s business and purpose, particularly for holding companies whose activities are inherently broad and strategic.
As the judgment clearly states: “A comprehensive consideration of the vendor’s activities is required, rather than isolating a single or a segregated set of transactions. The inquiry is not narrow or restricted. In this case, instead of examining the enterprise holistically, SARS impermissibly isolated the share offer.”
The dispute is raising capital an “enterprise”?
At the heart of the dispute was Woolworths’ 2014 acquisition of Australian department store David Jones. To fund the R21.4 billion deal, Woolworths initiated a R10 billion rights offer. It issued new shares to existing shareholders and incurred substantial underwriting fees. These fees attracted millions of Rands in VAT.
Woolworths claimed R8.47 million as input tax. It argued that the share issue formed part of its operations as an active investment holding company. SARS disagreed. The revenue authority argued that Woolworths did not regularly issue shares. It viewed the rights offer as an isolated, non-enterprise activity.
Additionally, SARS disallowed reductions to Woolworths’ output VAT for “imported services”. It imposed a 10% understatement penalty of R2.1 million.
SCA – SARS ignored the bigger picture
The SCA delivered a strongly worded judgment that rejected SARS’ narrow interpretation of enterprise activity. The court affirmed that Woolworths functions as an active investment holding company. Raising capital, it said, is a core element of such an enterprise.
The court observed that “[SARS] ignores a significant portion of the activities conducted by Woolworths Holdings”. It emphasised that the definition of “enterprise” in the Value-Added Tax Act demands a full consideration of an entity’s activities. Furthermore, the court noted that the Act explicitly includes activities related to the commencement of an enterprise.
A once-off capital-raising transaction does not disqualify a holding company from VAT claims. This is especially true for companies that acquire and manage subsidiaries.
Judge Nambitha Dambuza explained, “An entity conducting an enterprise as an investment company is entitled to input tax deduction in respect of costs incurred in relation to a rights offer made to shareholders to raise capital for further investment which would increase the value of its investments”.
The court also made a critical distinction from the earlier De Beers case. In De Beers, costs tied to a corporate takeover did not fall within the scope of its mining enterprise. In contrast, the Woolworths rights offer was closely tied to its business of managing and expanding investments.
The court concluded, “The submission on behalf of SARS in this case, that, based on these findings in De Beers, the holding of shares by Woolworths Holdings does not fall within the definition of enterprise, can only be based on a misreading of the judgment of this Court in De Beers”.
Imported services
Woolworths VAT win over SARS once again regarding “imported services”. The SCA ruled that the services from foreign underwriters did not qualify as imported services subject to extra VAT. This was because Woolworths used those services in furthering its enterprise.
This part of the ruling spares Woolworths additional liabilities. It also sets a precedent that benefits companies engaging offshore advisers in corporate deals.
Understatement penalty struck down
The SCA further set aside the 10% understatement penalty imposed by SARS on Woolworths. SARS had alleged that Woolworths relied on a tax opinion from its advisers only after the relevant VAT return had been filed, implying negligence or lack of disclosure.
The SCA found no factual basis for SARS’ accusation, noting the opinion was obtained, disclosed timeously and was ultimately correct in law. While SARS secured condonation for the late filing of its appeal, it was ultimately ordered to pay Woolworths’ legal costs, including the costs of two counsel.
A broader message for taxpayers – and SARS
This judgment lands amid an era of heightened SARS vigilance. In recent years, SARS has shown an increasing appetite for litigation and disallowing input tax deductions, often scrutinising whether transactions form part of a taxpayer’s “enterprise”. Businesses have seen revised assessments, reversed VAT refunds and aggressive challenges, sometimes based on arguments that no genuine enterprise exists.
For corporates, especially those planning mergers, acquisitions or capital-raising, the case is a reassuring precedent. It clarifies that capital-raising costs can indeed qualify for VAT deductions where linked to the vendor’s enterprise, even if the transaction is a once-off.
The ruling sends a clear message that SARS’ litigation zeal cannot override the fundamentals of the VAT system, which, as the court reminded, is meant to tax final consumption, not legitimate business operations conducted in the ordinary course.
Micaela Paschini | Team Lead | Tax Legal | Tax Consulting SA | mail me |
