Capitec wins major tax battle against SARS

 ·15 Apr 2024

The Constitutional Court has ruled in Capitec’s favour over a R71 million rand tax dispute with the South African Revenue Service (SARS).

The case revolved around a R71.5 million VAT claim by Capitec, dating back to 2017, made on free loan cover offered by the bank on its unsecured loans.

Capitec lends money to unsecured lenders as part of its business. Although Capitec did not charge fees for providing loan cover, it did charge interest, initiation, and service fees on the cover.

Thus, Capitec does not charge VAT on interest, but it does on the fees it levies – and claims input tax deductions attributable to the charging of those fees.

“To protect itself against the risk that unsecured borrowers might be unable to repay loans upon retrenchment or death, Capitec took out insurance policies,” said the Concourt.

“In terms of those policies, the amount of cover was slightly more than the sum which Capitec would lend to unsecured borrowers.”

In 2017, Capitec submitted its VAT return to SARS, and, in return, Capitec deducted the tax fraction of the full amount of the fees it levied, relying on section 16(3)(c) of the VAT Act.

“That section provides that a vendor may deduct, from its output tax, the tax fraction of any amount made to indemnify another person in terms of a contract of insurance, provided that the supply of the insurance contract constitutes a taxable supply,” said the Concourt.

“SARS disallowed the deduction on the basis that the supply of the loan cover did not constitute a taxable supply. SARS took the view that the loan cover was provided for no consideration and thus had no value; and in the alternative, that the loan cover constituted an exempt supply.”

“Consequently, SARS issued an additional assessment. Capitec objected to the additional assessment.

Following SARS’s disallowance, Capitec took the appeal to the tax court, which upheld the appeal and set aside SARS’ additional assessment.

The tax court said that the service fees charges Capitec were part of the consideration payable for the provision of credit.

“As such, the provision of loan cover was made for a consideration and in the course or furtherance of an enterprise that involved the making of taxable supplies. It concluded that the requirements of section 16(3)(c) were satisfied.”

However, SARS saw success at the Supreme Court of Appeal, which found that Capitec was a credit provider and not an insurer, and the provision of credit was an exempt supply.

Despite a minor component of Capitec’s business being a taxable supply (the charging of fees), this did not convert the exempt supply into a taxable supply.

As the loan cover was provided for no consideration, Capitec could not rely on section 16(3)(c), the SCA said.

“The court (SCA) found that unpaid fees charged by Capitec were capitalised and added to the balance of the loan, rendering them exempt. It further held that there was no basis to allow apportionment since Capitec had failed to plead this.”

ConCourt Ruling

Now, in a unanimous judgment, the Concourt said that Capitec’s provision of loan cover was free of charge and made a consideration of nil value.

“Although the loan cover was supplied free of charge, this did not disqualify it from being a taxable supply. In order to determine whether the loan cover was an exempt, taxable or mixed supply, the purpose of supplying the loan cover is an important consideration.

“On the undisputed evidence, the Court found that by providing free loan cover, Capitec was making its credit offering more attractive, the credit offering being one in which Capitec earned exempt interest and taxable fees.”

“Accordingly, the Court found that the loan cover was a mixed supply, made in the course or furtherance of Capitec’s exempt activity of lending money for interest and its taxable activity of lending money for fees.”

The Court said that unpaid fees do not lose their character as fees when capitalised and that the capitalisation had no legal significance on the question of whether the loan supply cover was taxable as per section 16(3)(c).

The Court said that Section 17, however, was inapplicable, but that apportionment was still mandated by the Act.

“SARS should not have disallowed the deduction in full and should have permitted a partial deduction.”

“Although Capitec did not plead partial deduction as an alternative, the Court found that it should not be penalised for its failure to do so, as SARS should not seek to exact tax which is not due and payable.”

The Concourt thus upheld the appeal and remitted the matter to SARS for further assessment.

Although each party had to pay its own costs in the Concourt and the Tax Court, Capitec was ordered to pay SARS’ costs in the SCA.

The ruling can be found below: mobile users can click here):

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