Cape Town - The South African Revenue Service (Sars) has won its long-running legal war against Capitec Bank, with the Supreme Court of Appeal (SCA) validating its appeal against a judgment handed down by Acting Judge Frederick Sievers of the Cape Town Tax Court.
The ruling by the SCA means that Sars can now prevent Capitec Bank from claiming back a R71.5 million VAT return from November 2017.
On February 15, 2018, Sars issued a VAT assessment disallowing the R71.5 million claimed by Capitec as a tax deduction in its November 2017 VAT return on the basis that it did not qualify for a deduction in terms of the VAT Act.
Additionally, Sars also levied a 10% late payment penalty for the resultant understatement of Capitec’s VAT liability.
The Tax Court judgment had ruled that Capitec was entitled to deduct the amount from its VAT liability by virtue of the VAT Act and had directed Sars to refund Capitec with interest at the prescribed rate from the date of payment to the date of refund.
It was this ruling that Sars appealed and won, with the SCA judgment pointing out that the tax collector had been correct all along.
The input tax deduction that Capitec claimed relates to its unsecured lending business, in terms of which Capitec advances credit in the form of personal loans to customers under term loan contracts.
In terms of a clause in a standard loan contract entered into between Capitec and its customers, Capitec provided its customers with loan cover, the proceeds of which were applied to settle or reduce the outstanding loan amount due to Capitec in the event of the customer’s death or retrenchment.
The loan cover was underwritten by Guardrisk Life Limited, to whom Capitec paid premiums. Before that, the loan cover was underwritten by Channel Life Insurance Limited.
Under the insurance policies, Capitec is the insured and becomes entitled to the benefits if the loan is not repaid on account of the death or retrenchment of the borrower.
In essence, the loan cover was insurance taken out by Capitec, which covered it against the risk of outstanding amounts owing under which the unsecured loans became irrecoverable if the borrower died or was retrenched.
In this way, Capitec insured itself against the unpaid amount, resulting in the loan being paid in full and Capitec not suffering a loss of credit.
Sars argued that the loan cover payments did not qualify for an input tax deduction in terms of the VAT Act because the supply of the loan cover did not constitute a taxable supply.
Sars said that since Capitec did not charge any consideration for the loan cover, and because the cover was supplied in the course of Capitec’s business, this made it an exempt supply and not a taxable supply.