It is trite that the Value-Added Tax Act 89 of 1991 (the “Act”) imposes an obligation on vendors to charge VAT on the goods and services supplied by them. The Act does, however, also provide relief from this obligation, either in full or in part. The Supreme Court of Appeal, in Respublica v CSARS, dealt with the specific requirements in order for one to be entitled to the relief provided by section 10(10) of the Act. This provision entitles a vendor to VAT relief by only having to charge VAT on 60% of the consideration that it receives if certain conditions are met.

Put briefly, the facts of this case are that Respublica supplied accommodation, together with amenities, to TUT. TUT then further supplied this accommodation to TUT students. The taxpayer (“Respublica”) argued that the relief provided by Section 10(10) of the VAT Act applied to its taxable supplies and that it was therefore only obliged to charge VAT on 60% of the total consideration received from TUT under the lease agreement. SARS, however, disagreed. Section 10(10) provides that ‘Where domestic goods and services are supplied at an all-inclusive charge in any enterprise supplying commercial accommodation for an unbroken period exceeding 28 days, the consideration in money is deemed to be 60 per cent of the all-inclusive charge.’

This matter ultimately concerned the proper characterisation, for value-added tax (VAT) purposes, of the supply of a building and related goods and services to an educational institution under a written agreement, more particularly, whether that supply amounted to the supply of ‘commercial accommodation’ as defined in s 1 of the Act.

Section 10(10) finds application where a vendor supplies, inter alia, ‘commercial accommodation’. Commercial accommodation is essentially defined in the VAT Act as lodging or board and lodging, together with domestic goods and services, in any house, flat, apartment, room, hotel, motel, inn, guest house, boarding house, residential establishment, holiday accommodation unit, chalet, tent, caravan, camping site, houseboat, or similar establishment, which is regularly and systematically supplied.

Respublica contended that its supply to TUT met the definition of commercial accommodation, because the accommodation supplied by it was used by the students, who were in truth the ‘lodgers’.

The Court, however, stated that Respublica’s contention fails to take proper account of the nature of the contractual arrangements and conflates two distinct supplies. On this point, the court went on to state that two distinct legal relationships were contemplated. The first, between Respublica and TUT and, the second, between TUT and its students and holiday visitors. In terms of the first, there was a 5-year renewable lease of immovable property by Respublica to TUT, together with an undertaking to provide specified services and utilities to the property. The second contemplated numerous shorter term agreements between TUT and its students and holiday visitors in terms of which the former provided accommodation to those persons. There was no contractual relationship between Respublica and the students or holiday visitors for the lease of the premises or the provision of accommodation. The students looked to TUT for a place in the residence, which the latter hired from Respublica. TUT made a separate supply of accommodation to its students.

The Court concluded by stating that the test for whether Respublica supplied lodging cannot be whether the end-use of the property under the second set of supplies by TUT was temporary in nature or constituted the supply of lodgings to the students. The relevant contractual rights and obligations were those as between Respublica and TUT, and did not involve the supply of temporary accommodation. The fact that TUT supplied temporary accommodation in the form of lodging to its students is therefore irrelevant.

In addition to finding that Respublica did not supply commercial accommodation to the students, the Court further concluded that On the ordinary meaning of the word, a ‘lodger’ is a natural person who actually takes up temporary accommodation. If so, lodging cannot be provided to a juristic person. Hence, Respublica could not be said to have supplied commercial accommodation to TUT.

Accordingly, as the supply by Respublica to TUT does not meet the first requirement of the ‘commercial accommodation’ definition that suffices to determine the appeal against it.

The takeaway:

When determining whether section 10(10) of the VAT Act finds application to one’s taxable supplies, the relevant contractual rights and obligations to consider are those as between one and one’s customer. The supplies rendered by one’s customers are therefore not of relevance in determining the applicability of section 10(10) to one’s vatable supplies. This case also suggests that section10(10) will not find application in cases where supply is being rendered to a juristic person.