Payments on loan account: when is payment considered to be made for VAT purposes?

Payments on loan account: when is payment considered to be made for VAT purposes?

• 06 May 2020
• VAT
• Varusha Moodaley

Thursday, 19 May 2016

Important:

This article is based on tax law for the tax year ending 28 February 2017.

Author: Seelan Moonsamy

In the case of Claremont Library Development Company (Pty) Ltd v The Commissioner for the South African Revenue Service, the Tax Court recently considered the question of whether crediting a loan account constitutes “payment” of full consideration for purposes of the Value-Added Tax Act, No 89 of 1991 (the “VAT Act”).

The appellant, Claremont Library Development Company (“CLDC”), appealed against an assessment issued by the South African Revenue Service (“SARS”) in terms of section 22(3) of the VAT Act. Section 22(3) of the VAT Act provides that where a vendor (who is required to account for tax on an invoice basis) has claimed an input tax deduction in respect of the acquisition of a taxable supply, but has not, within a period of 12 months from the date of such supply, made payment of the full consideration in respect of such supply, that vendor shall be liable to account for deemed output tax equal to the tax fraction of the outstanding amount not paid. Section 22(3) is aimed at preventing the situation where the debt, being outstanding for more than 12 months, is written off by the supplier as irrecoverable and the supplier claims the bad debt relief for the output tax accounted for, and the recipient deducts the VAT charged as input tax even though no payment is ever made for the supply, which would be to the detriment of the fiscus.

On 2 April 2009, Corevest (Pty) Ltd (“Corevest”), the sole shareholder and holding company of CLDC, issued a tax invoice to CLDC in respect of a taxable supply amounting to ZAR82 095 000. CLDC accordingly claimed an input tax deduction in respect of the amount incurred. On receipt of the input tax refund from SARS, CLDC paid the input tax amount over to Corevest, which Corevest then paid over to SARS as output tax. The remaining liability due to Corevest of ZAR73 023 258 was then credited to Corevest’s loan account in CLDC’s books in accordance with a funding arrangement between the parties. Both CLDC and Corevest considered that the liability under the tax invoice had been paid after Corevest’s loan account was credited. The amount in question was accordingly reflected in CLDC’s financial records as a long-term debt, whereas it was reflected as a non-current asset in Corevest’s books.

This article first appeared on ensafrica.com.

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