In the case of VAT 1247: XYZ Company (Pty) Ltd v The Commissioner for The South African Revenue Service, the court was faced with interpreting section 22(3) of the VAT Act, notably, in relation to a period before 22(3A) was introduced. Section 22(3) of the VAT Act in essence requires a person who has claimed an input tax deduction to make an output VAT adjustment if the invoice on which the input was claimed has not been settled within a period of 12 months.
The facts of the case are briefly that a supply was made from company A to Company B. Company B proceeded to claim an input tax credit back from SARS and once refunded, paid the Vat portion for the supply to Company A. Company A subsequently paid the VAT on the supply across to SARS and credited the loan account in respect of the invoice and debited a long term liability. The long term liability was not settled by Company B within 12 months.
The taxpayer argued that crediting the loan account of Company A constituted payment of the invoice and accordingly, section 22(3) should not find application and in addition, there was no prejudice to SARS. SARS, in turn, argued that the debt still existed and was not settled within 12 months and that section 22(3) should apply.
The court in arriving at its decision that section 22(3) does not find application in casu stated that the purpose of section 22(3), per the Explanatory Memorandum to the amendment bill that introduced same, was to prevent abuse of the irrecoverable debt provisions in section 22 that resulted in prejudice to SARS. As there is no prejudice for SARS in this case, the court ruled that section 22(3) does not find application.
It will be interesting to see if SARS appeals this decision as taxpayers may be tempted to henceforth merely move liabilities around on the balance sheet to prevent the application of 22(3). Such temptation should however preferably be resisted without consulting an expert as the judgment is fact specific and the intention of Company A and Company B ostensibly played a vital role in the court’s conclusion together with the fact that there was no prejudice to SARS.
The issue is however mostly moot in relation to group transactions where such transactions fall within the carve out created for same in section 22(3A), introduced with effect from 10 January 2012.