VAT zero rating

AB CC v CSARS VAT 1005 GTC 9 Dec 2014

08 January 2015
Posted by: Author: Pieter Faber

Author: Pieter Faber (SAIT)


This is an appeal to the Gauteng division of the Tax Court by the vendor for the determination of whether the services rendered by the vendor fell within the ambit of the zero rating for VAT in terms of section 11(2)(s) of the VAT Act.


The appellant is involved in the construction of low cost housing.  The appellant took cession of an agreement with C whereby the appellant would rehabilitate houses built between 1994 and 2002 in terms of the Housing Subsidy Scheme implemented in terms of the Housing Act. During the period of the contract from 08/2008 – 09/2010 the appellant charged VAT at the standard rate on these services. However C, referring to the contract, informed the appellant that it was entitled to charge VAT at the zero rate. The contract stated that the agreement for the rectification of the houses would be in terms of Housing Code to assist households in emergency cases. It was furthermore recorded that the agreement complies with the provisions of the Housing Subsidy Scheme and that VAT at a zero rate applied in terms of section 11(2)(s) of the VAT Act.  Thereafter the appellant submitted revised VAT returns which entitled it to a refund of R38m.

SARS refused the refund on the basis that services rendered were not for building new houses for first time owners and therefore did not qualify under Housing Subsidy Scheme and that the reference to the zero rating in the contract was made in error. It contended that there were just six mechanisms under the National Housing Code 2000 which applied and none of the services fell within the ambit of such six mechanisms. SARS did at some stage consider repayment of the amount but on condition that it be refunded to C, however, C had already engaged the appellant to render other services to the value of the refund amount and therefore such refund would cause the appellant to be out of pocket.


The court approached the matter by concluding that it had to determine whether the rehabilitation and building of new houses fell under the Housing Subsidy Scheme and for this it was necessary to determine what such scheme was and what it covered. Based upon the evidence led the court concluded that such meaning was not evident from the Housing Act which purported to deal with the matter but rather the mechanisms of the Housing Code 2000. SARS upon examination conceded that more than six mechanisms did in fact exist and that the Housing Subsidy Scheme was not limited to new houses as stated in the assessment.

The court found that there was no consistency amongst the various government departments concerning the interpretation of the housing subsidy schemes but that it was obvious that the Provincial Government who drafted the agreement made it clear that the zero rating did apply. It was clear that there was no cut and dry definition of what a housing subsidy scheme entailed as it varied from one person to another and various external documents had to be referenced to source a specific person’s interpretation. The court, relying on the dictum in Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) at [18] that the normal words should be applied and where more than one meaning is possible the various factors must be considered whereby a sensible business-like meaning would be preferred, concluded that the term “Housing Subsidy Scheme” is not defined in the VAT Act or Housing Act and that a meaning should be sought. It accordingly relied on the unambiguous statement in the agreement that the relevant services would fall within the ambit of the housing subsidy scheme. The court furthermore applied the contra fiscum rule as stated in Badenhorst v CIR 1955 (2) SA 207 (N) 215 on the various conflicting interpretations given by the parties and accepted the explanation by the appellant. The court ordered that the assessment be revised and that SARS refunds the appellant the R38m with interest at 9 per cent calculated from the date of the order.

As to the matter of costs, the court found that both parties caused the relevant delays in proceedings and that due to the confusing interpretation, SARS’ grounds of assessment were not unreasonable. Accordingly no cost order was made.

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