Capitec Bank Limited’s VAT deduction[1]

The Supreme Court of Appeal has denied Capitec Bank Limited ("Capitec") a VAT deduction of ZAR 71,5 million claimed in terms of section 16(3)(c) of the VAT Act.

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Background

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Capitec provided loan cover to its borrowers (covering the risk of default on its loans to them should a borrower die or be retrenched). Capitec did not charge its borrowers any consideration for the insurance cover provided to them (Capitec sought to argue that this was not in fact the case).

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Capitec, in turn, obtained insurance cover from its insurer covering such risks.

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In a particular VAT period, Capitec received payments from its insurer and applied for such payments in settlement of its borrowers’ indebtedness to it (which, for example, meant that Capitec did not pursue its deceased customers’ estates for loan repayment).

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Capitec’s insurer was required by law to levy and add VAT to its insurance premiums (paid by Capitec) and account to, and pay to SARS such VAT.

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The position in the Supreme Court of Appeal was that the insurance payments, received by Capitec under the relevant insurance policy, attracted VAT in Capitec’s hands (because the insurance payment, to the extent that it related to a loss incurred in the course of carrying on an enterprise, was treated as received for a supply of services performed on the day of receipt of that payment in the course of furtherance of its enterprise).

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To ensure there was no VAT leakage on such insurance payments (as Capitec effectively applied insurance payments in settlement of its borrowers’ indebtedness to it), Capitec sought to claim a deduction against its deemed VAT output liability on the insurance payment. The amount of the VAT deduction was computed by applying the result of the tax fraction (14/114) to the amount of the insurance payment received.

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Under the enterprise definition in the VAT Act:

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·??????Capitec’s provision of interest-bearing loans to its customers constituted an exempt financial service (which meant that Capitec did not carry on an enterprise, as defined for VAT purposes, in respect of this particular activity); and

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·??????Capitec’s provision of loan cover services to its borrowers (covering the risk of default on its loans to them should a borrower die or be retrenched) also did not constitute an enterprise as defined for VAT purposes. The reason for this is that a definitional requirement for an enterprise to be carried on, for VAT purposes, is that the activity must be carried on continuously or regularly in the course or furtherance of which goods or services are supplied to any other person for a consideration. As Capitec did not charge its borrowers a fee for the provision of the loan cover services no loan cover enterprise was carried on.

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Therefore - even though section 16(3)(c) of the VAT Act provides a VAT deduction in respect of a payment, made during a VAT period, by a vendor to indemnify another person in terms of any contract of insurance - this deduction could not be claimed because Capitec’s supply of insurance to its borrowers did not constitute a taxable supply[2] (which is a deductibility requirement under the provision).

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Capitec’s loan cover services to its borrowers did not constitute taxable supplies, on the facts, because Capitec did not levy a fee for such services to them (which meant that such activity did not constitute an enterprise).

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The Supreme Court of Appeal therefore concluded that Capitec was not entitled to the section 16(3)(c) deduction.

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An interesting issue that does not appear to have been fully canvassed in the Supreme Court of Appeal was whether Capitec was liable, in the first place, for output VAT on the insurance payments received from its own insurer. This question arises because Capitec’s activities (provision of loans and loan cover), in respect of which it received insurance payments, were held not to constitute an enterprise as defined in the VAT Act.

[1] The Commissioner for SARS v Capitec Bank Limited SCA Case No. 94/2021

[2] A taxable supply refers to a supply of goods or services which is chargeable with tax under the provisions of section 7(1)(a) of the VAT Act (or which is zero-rated under section 11).