British Airways Plc, an international air carrier operating in South Africa, is a vendor for VAT purposes. The Airports Company Limited levied a passenger service charge on British Airways calculated with reference to the number of passengers departing on its aircraft. This charge compensated the Airports Company for general airport services (baggage handling, waiting lounges, check-in counters, etc.) provided to passengers. British Airways recovered this charge directly from passengers by reflecting it separately on passenger tickets as part of the composite fare. The Commissioner for SARS assessed British Airways for VAT at the ordinary rate (14%) on the element of the fare representing recovery of the passenger service charge for the period September 1993 to December 1998, contending it was separate from the zero-rated international carriage service. British Airways argued the entire composite fare was zero-rated under s 11 as it was all for international carriage.
The appeal was dismissed with costs, including costs of two counsel. The Tax Court's decision in favor of British Airways was upheld.
Section 8(15) of the Value-Added Tax Act 89 of 1991 only applies to notionally separate parts of a single supply where the same vendor supplies more than one service, each of which would attract a different tax rate if supplied separately. The section does not levy tax on a vendor for services that vendor does not actually supply. Where a vendor recovers from customers a charge levied on it by a third party for services supplied by that third party, the recovery does not constitute a separate supply by the vendor of those services. The vendor's recovery of such costs is simply part of the consideration for the service the vendor actually supplies. VAT liability under s 7 arises when the actual supplier of services provides those services, and a further tax does not accrue when another party merely recovers the cost of those services.
The court noted that the passenger service charge was similar in nature to landing and parking charges that airlines pay, both being operating costs. The court observed that passengers do indeed receive airport services before boarding and after disembarking, and part of the fare arises from the provision of those services, but this does not make the airline the supplier of those services. The court implicitly rejected the notion that there was a chain of supply whereby the Airports Company supplied services to British Airways, which then re-supplied them to passengers.
This case established important principles regarding VAT liability in the airline industry and clarified the application of s 8(15) of the VAT Act. It confirmed that for VAT purposes, the identity of the actual supplier of services is determinative of who bears the tax liability. The mere recovery of costs by one party does not transform that party into the supplier of the underlying services for VAT purposes. The case is significant for distinguishing between the supply of services and the recovery of costs related to services supplied by third parties, particularly in composite pricing arrangements. It provides guidance on when separate elements of a composite charge should be treated as separate supplies for VAT purposes and reinforces that zero-rating applies to the entire consideration for an international carriage service, even where that consideration includes recovery of specific third-party charges.