Marvelous Tapera 
Value Added Tax (VAT) is an indirect tax on consumption, charged on the supply of taxable goods and services at a rate of 14.5 percent and zero percent. No VAT is paid on exempt supplies. Input tax is tax incurred by the operator on acquisition or importation of goods or services to be used in the production of taxable supplies.
It does not cover tax incurred on inputs, expenses or purchases used to make exempt supplies or incurred by non-registered persons. Registered operators including those producing zero rated supplies are entitled to claim tax on inputs used by them in making taxable supplies. If the inputs are used to produce mixed supplies, input tax is not claimable to the extent that it is incurred on acquisition of goods or services, which relates to production of exempt supplies. Documentation is central to the claiming of input tax.
It constitutes the basis of claiming input tax to avoid proliferation of fictitious input tax claims. No input tax credit is claimed on the goods or services that are used in the provision of entertainment. Entertainment means the provision of any food, beverages, accommodation or recreation or hospitality of any kind by a registered operator whether directly or indirectly to anyone in connection with a trade carried on by him.
In Rev v Hathorn & Others 1948 (4) SA 162, 15 SATC 456 at 461 it was held that, entertainment is capable of comprehending a banquet, a meal, or indeed refreshments of any kind and hospitable provisions generally.
Therefore, the term is very wide as to include anything, which can provide enjoyment, amusement or indeed can be considered to be a meal or refreshment. For instance refreshments such as tea, coffee and other beverages and snacks and ingredients bought to provide meals to staff, clients and business associates constitutes entertainment expenditure. The following forms of entertainment on which input tax is denied are discussed in this article.
– Food and other ingredients bought to provide meals to staff, clients and business associates, including year-end lunches and parties, hiring of venues for those functions, complimentary staff refreshments for example tea, coffee or snacks.
– Business lunches or other entertainment of customers and clients in restaurants, theatres, night clubs or sporting events, food given to employees or directors at meetings.
– Goods and services acquired for providing employees with meals and beverages at workplace canteens if the price charged by the employer does not cover the direct and indirect costs of providing those benefits and facilities or is not equal to the market value of such meals and beverages, for example catering services, furniture, equipment and utensils used in kitchens, canteens and dining rooms.
-Facilities used in canteens and offices to facilitate the provision of entertainment including utilities for example stoves, plates, office water coolers, refrigerators, electricity, water, canteen staff uniforms.
-Beverages, meals, entertainment shows, amusements or other hospitality supplied to customers and clients at product launches and promotional events.
– Accommodation, including hotels, theatre and concert tickets, sporting events and facilities, entry to clubs and nightclubs, free samples, business gifts, Christmas lunches and parties, including hire of venues; entertainment of customers in restaurants, theatres and night clubs, DSTV subscriptions, whether for staff or office televisions, hampers, refreshments during meetings.
It was held AB (Pty) Ltd v Commissioner for the South African Revenue Service that the term entertainment is defined and is unambiguous, and that meals and accommodation are included in the definition of entertainment and that there is no problem with that interpretation that would warrant “a resort to other canons of interpretation”, presumably a purposive and restrictive interpretation.
This means that as long as an expenditure falls within the definition of entertainment, it would not qualify for input tax deduction even if the expenditure has been incurred in the production of taxable supplies. It is not the purpose for which the expenditure is applied on that matters but the meaning of the expenditure.
The taxpayer, a registered operator provided services in the mining industry. It provided accommodation and meals to its employees most of who were not from South Africa. It outsourced the provision of the said accommodation and meals by contracting with third parties operating close to the relevant mines. The third party was a registered operator and levied VAT in respect of the supply of the accommodation and meals. The taxpayer claimed input tax deductions on these expenses, which SARS disallowed on the basis that accommodation and meals constituted “entertainment”.
The taxpayer argued that, under the circumstances in question, the provision of the accommodation and meals should not be construed as entertainment because there was no personal enjoyment by the taxpayer.
It also argued that entertainment should not be deemed since the employees only received basic food and accommodation and there was no intention of providing personal enjoyment and that the mischief that the VAT Act intended to address by prohibiting the deduction of input tax was accordingly not present in the circumstances.
It further argued the court should not apply the restrictive interpretation as contemplated under the South African VAT laws. The court held that the strict qualification of the expenditure as entertainment overrides what it is used for and that legislature could not have intended for the provision of accommodation and meals to be categorised into basic or luxurious so as to determine whether it should be exempt from the prohibition.
Entertainment does not include such goods or services as are acquired by a registered operator for making taxable supplies of entertainment in the ordinary course of a trade, which continuously or regularly supplies entertainment to clients or customers provided such taxable supplies of entertainment are made for a charge, which covers all direct and indirect costs of such entertainment or is equal to the open market value of such supply of entertainment.
Persons in the business of entertainment such as hotels are therefore, allowed to claim input tax on goods or services used in providing entertainment as long as such entertainment is provided at value, which is at least equal to direct or indirect cost of entertainment.
In conclusion, registered operators should make sure that they are in the business of regularly supplying entertainment before claiming input tax.
Meanwhile, Matrix Tax School invites you to take part in the Managing Tax Practise- Advanced course which starts on October 5, 2021 and is for a duration of eight weeks.
Tapera is the founder of Tax Matrix (Pvt) Ltd and chief executive of Matrix Tax School. He writes in his personal capacity.
