Capitec Bank VAT Case (Case CCT 209/22)

The Constitutional Court of South Africa decided the Capitec Bank Limited versus Commissioner for the South African Revenue Service (SARS) on 12 April 2024. The case dealt with whether a supply free of charge may constitute a taxable supply. The case also dealt with the supply of an insurance contract to borrowers who pay interest and fees exclusively in the course or furtherance of an exempt supply and whether a deemed input (section 16(3)(c)) may not be claimed, may be claimed in full, or whether an apportioned claim can be made.

This case deals with the interpretation and application of section 16(3)(c) of the Value-Added Tax Act (VAT Act). Capitec Bank Limited (Capitec) applied for leave to appeal a judgment of the Supreme Court of Appeal, in which an appeal by SARS was upheld against a decision of the Tax Court in Capitec’s favour.

Capitec lends money to customers as part of its business. Capitec charges interest and initiation and service fees.

A Supply is a taxable supply if done in the course or  furtherance of an enterprise. An enterprise is an enterprise or activity in the course or furtherance of which goods or services are supplied for a consideration, whether or not for profit. To the extent that an activity involves the making of exempt supplies it is deemed not to be the carrying on of an enterprise. The supply of financial services is an exempt supply and includes the provision of credit at a cost to the recipient. To the extent that the consideration payable is a fee, commission, merchant’s discount, or similar charge, excluding any discount cost, it is deemed not to be financial services. The term consideration is defined to include everything that would commonly be regarded as consideration, whether in money or kind.

Capitec took out insurance to protect itself against the risk that borrowers might be unable to repay loans upon retrenchment or death. The “insured” was Capitec and the “insured life” was a Capitec borrower meeting certain criteria. The “insured event” was “the retrenchment or death of an insured life”. The policy specified the premiums payable by Capitec and the policy benefits payable by the insurer to Capitec on the happening of an insured event. Capitec’s standard unsecured lending contract with its customers made provision for “loan cover” in case of death or retrenchment.

Capitec claimed a full deduction in terms of section 16(3)(c). SARS disallowed the deduction. Following SARS’ disallowance of Capitec’s objection to the additional assessment, Capitec appealed to the Tax Court. The Tax Court  found in favour of Capitec on the basis that, although Capitec made no distinct charge for the loan cover, the cost of such cover was recovered at least in part through the service fees which Capitec charged. The fees constituted consideration for the cover. The unsecured lending business was part of Capitec’s “enterprise”. The Tax Court concluded that the requirements of section 16(3)(c) were satisfied and upheld the appeal.

The Supreme Court of Appeal upheld SARS’ appeal against the Tax Court’s order, replacing the latter order with one dismissing Capitec’s appeal. The Court concluded that carving out the taxable component did not convert what was in essence an exempt supply into a taxable supply which led to the question whether the fees charged by Capitec were charged on the supply of the loan cover to its customers. The Court answered no and referred to the terms of the loan contract and that the initiation and service fees chargeable in terms of the National Credit Act were regulated separately from the cost of credit life insurance. The cost of credit life insurance, if consideration was charged for it, would have required separate disclosure. The Court argued that since the loan cover was provided for no consideration, its supply did not qualify as an enterprise. That definition required there to be a consideration for the goods or services supplied. The Court rejected Capitec’s argument that the claim could be subject to apportionment.

In the Constitutional Court, Capitec disputed the Supreme Court of Appeal’s conclusion that a supply made for no consideration can never be a taxable supply. Such a supply, if made in the course or furtherance of an enterprise in which taxable supplies for consideration are made, is itself a taxable supply with a deemed consideration of nil, as provided for in section 10(23). SARS supported the Supreme Court of Appeal in that the supply of the loan cover was made in the course of the exempt activity of supplying credit and that the cost of providing the loan was built into the interest rate. SARS also relied on the Supreme Court of Appeal’s conclusion that the loan cover was provided for no consideration and was not a taxable supply. SARS contended, at best for Capitec, the loan cover was supplied in the course of making mixed supplies which were partly exempt and partly taxable and subject to apportionment in terms of section 17.

The Constitutional Court held that Capitec would not have provided loan cover to its unsecured borrowers unless the interest and fees covered all its costs. The Court found that the definition of “enterprise” requires that the enterprise or activity must be “carried on continuously or regularly” and must be one in the course or furtherance of which goods or services are supplied to another person “for a consideration, whether or not for profit”. The definition of “enterprise” does not require that all goods or services supplied in the course of that activity must be supplied for a consideration. Goods supplied free of charge are undoubtedly supplied in the course or furtherance of the enterprise, even though they are supplied free of charge. Section 10(23) is therefore relevant, namely “where any supply is made for no consideration the value of that supply shall be deemed to be nil.” It is important to classify the supplies as taxable supplies, since this determines the vendor’s right to deduct VAT incurred to make the supplies free of charge as input tax. The vendor is only entitled to an input tax deduction to the extent that supplies were consumed, used, or supplied “in the course of making taxable supplies”.

The cover provided by Capitec advanced its business of lending money to unsecured borrowers. Capitec lent money to unsecured borrowers to earn exempt interest and taxable fees. The Constitutional Court reached the conclusion that the loan cover was a mixed supply made in the course and furtherance of Capitec’s exempt activity of lending money for interest and its enterprise activity of lending money for fees. SARS argued and the Supreme Court of Appeal held that section 17 apportionment was not available in this case because Capitec had not pleaded it. The Court held that although apportionment in terms of section 17 would yield an acceptable result, the language of the Act does not accommodate it. Section 16(3)(c) requires that the supply of the contract of insurance should be a taxable supply in order to qualify for deduction. In terms of the proviso to section 2(1), one needs to view the supply of the contract of insurance as partly a taxable supply and partly an exempt supply. This in itself suggests an apportionment. The Court concluded that SARS should not have disallowed the objection in full as it should not seek to exact tax which is not due and payable. The Court referred the issue of determining an appropriate apportionment to SARS. The Court held that the parties should bear their own costs.

The judgement of the Constitutional Court seems to be fair and reasonable. The acknowledgement of supplies for nil consideration to still constitute supplies in the course or furtherance of an enterprise is a welcome affirmation.