[FAQ] Input tax on the acquisition of courtesy motor vehicles acquired by an auto body repair company

[FAQ] Input tax on the acquisition of courtesy motor vehicles acquired by an auto body repair company

• 10 June 2021
• VAT
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2021.

Background

A taxpayer operates an auto body repair shop. He purchased vehicles under lease agreements. The vehicles will be used by customers as courtesy cars. No input tax is claimable for car hire of vehicles, unless they form part of a dealership or rental agent.

Is there a possibility that the taxpayer could claim the input tax should the customers be covered by their insurance for the use of the courtesy cars? Therefore, the customer’s insurance includes the courtesy cars and the taxpayer in effect recovers the cost in their tax invoice to the insurance company.

Answer

The VAT Act

Section 17(2)(c) of the VAT Act denies an input tax deduction in respect of the supply of a motor car to a vendor.

“Motor car” is defined in section 1(1) of the VAT Act as a motor car, station wagon, minibus, double cab light delivery vehicle and any other motor vehicle of a kind normally used on public roads, which has three or more wheels and is constructed or converted wholly or mainly for the carriage of passengers. The definition excludes certain categories of vehicles not relevant for this discussion.

Proviso (i) to section 17(2)(c) of the VAT Act determines that the prohibition on the claiming of input tax on the supply of a motor car does not apply “where the motor car is acquired by the vendor exclusively for the purpose of making a taxable supply of that motor car in the ordinary course of an enterprise which continuously or regularly supplies motor cars, whether that supply is made by way of sale or under an instalment credit agreement or by way of a rental agreement at an economic rental consideration.”

Application of the principles

There are a number of requirements that must be met before proviso (i) to section 17(2)(c) of the VAT Act will apply.

The first requirement is that the motor car must be acquired by the vendor exclusively for the purpose of making a taxable supply with the motor car. If a motor car is accordingly to any extent provided as a courtesy car for which no charge is levied, the proviso would not apply and input tax on the acquisition of the motor car would be disallowed.

If the above requirement is met, the further requirement that must be met is that the VAT vendor must carry on an enterprise in the ordinary course of which it continuously or regularly supplies motor cars. If this is the manner in which the auto body shop operates its business, this requirement would probably be met.

The final enquiry is whether the motor car is supplied by way of a rental agreement at an economic rental consideration. If all costs (direct and indirect) of supplying the motor car is covered in the recovery from the insurance company, the “economic rental consideration” requirement would be met.

The remaining issue for consideration is whether it could be held that the motor car is supplied by way of a rental agreement. The VAT Act is not prescriptive as to what constitutes a rental agreement. It could accordingly be argued that the arrangement between the insurance company and the auto body repair shop for the temporary use of the car would constitute an agreement of rental.

Summary

If the motor cars are exclusively acquired for the purposes of supplying it to clients in respect of which an insurance company will cover the cost, it could be argued that the arrangement falls into proviso (i) to section 17(2)(c) of the VAT Act and that input tax may accordingly be recovered on the acquisition of such motor cars. If a separate charge for the use of the motor car is not charged to the insurance company on the auto body repair company’s tax invoice, the argument for the deductibility of the input tax on the acquisition of the motor cars may be prejudiced.

As the issue is not clear cut and will depend on the specific circumstances of each vendor impacted, we recommend that SARS be approached to obtain a Private Binding Ruling before a final decision is taken whether the input tax is recoverable.

Webinar Commentary

Refer to the following webinar: Considering a 360 on Leases: Tax vs IFRS for SME 2021

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