Aveng Mining Shafts & Underground v The Commissioner for the South African Revenue Service

Aveng Mining Shafts & Underground is a vendor conducting an enterprise of shaft sinking and mining construction activities for various mining clients. From time to time, it employs employees who are deployed to mines for limited periods to perform work on specific projects. These employees are required to be accommodated close to the mines and are provided with food. Aveng pays the suppliers for accommodation and food charged, which constitute entertainment expenses. Aveng's enterprise does not involve making taxable supplies of entertainment. Aveng does not separately charge its clients for these costs; rather, an estimate of the costs is included in the overall tender price charged to clients. For the period 06/2012 to 08/2016, Aveng claimed input tax of R17,495,071.81 in respect of entertainment expenses for these employees under s 17(2)(a) of the Value-Added Tax Act. CSARS disallowed the input tax deduction on the grounds that the entertainment expenses were for employees not away from their usual place of work and Aveng did not recoup the expenses from the employees. Aveng objected and appealed to the Tax Court, which dismissed the appeal. Aveng then appealed to the Supreme Court of Appeal with leave of the Tax Court.

• Whether input tax on charges for accommodation and food acquired by a vendor for specific project employees is deductible from output tax under s 17(2)(a)(i)(bb) of the Value-Added Tax Act 89 of 1991
• Whether accommodation and food acquired for employees constitute goods or services acquired for making taxable supplies of entertainment in the ordinary course of the vendor's enterprise
• Whether such accommodation and food were supplied to employees for a charge
• Whether all direct and indirect costs of such entertainment were covered by any charge made
• Whether the neutrality principle of VAT law allows deduction of input tax on entertainment expenses

The appeal was dismissed with costs. Costs were limited to one counsel only, as the matter was not of such complexity to justify two counsel despite involving an important point of principle.

The binding legal principles established are: (1) Section 17(2)(a) of the Value-Added Tax Act creates a general prohibition against deducting input tax on goods or services acquired for purposes of entertainment, and the exceptions in the proviso must be interpreted restrictively. (2) For input tax on entertainment expenses to be deductible under s 17(2)(a)(i)(bb), the goods or services must be acquired 'for making taxable supplies of entertainment in the ordinary course of an enterprise' - the vendor's enterprise must be entertainment, not merely incidental entertainment in the course of another enterprise. (3) The neutrality principle of VAT, while relevant to context and purpose, cannot displace or override the ordinary meaning of express statutory wording that prohibits deduction of input tax. (4) Where a vendor's enterprise is not the supply of entertainment (e.g., shaft sinking and mining construction), input tax on accommodation and food provided to employees does not qualify for deduction under s 17(2)(a)(i)(bb) even if such expenses are ultimately built into prices charged to clients. (5) For the exception to apply, charges for entertainment must be recovered and must cover all direct and indirect costs of such entertainment.

The Court made observations about the policy rationale behind the prohibition on deducting input tax for entertainment expenses, noting that as a matter of policy, such deductions have not been viewed favourably because of potential for abuse. The Court cited the VATCOM report from February 1991 which explained that it is extremely difficult to distinguish between entertainment expenses for business versus private purposes, that such expenses often have only tenuous links to business activities, and that there is often an element of personal enjoyment involved (such as taking a client to a sporting event the businessperson wishes to attend). The Court noted that whether deduction of input tax in a particular scenario might or might not result in abuse is not the issue - the question is purely whether a vendor can establish that particular input tax falls squarely within the parameters of one of the statutory exceptions. The Court also noted that its conclusions were consistent (though not binding) with SARS' Guide: VAT 411 – Guide for Entertainment, Accommodation and Catering; the VATCOM report; and the Explanatory Memorandum on the Taxation Laws Amendment Bill, 1997.

This case provides important guidance on the interpretation and application of s 17(2)(a)(i)(bb) of the Value-Added Tax Act regarding the deductibility of input tax on entertainment expenses. It establishes that the exceptions to the general prohibition on deducting input tax for entertainment must be interpreted restrictively. The judgment clarifies that the neutrality principle of VAT, while important contextually, cannot override express statutory prohibitions. It confirms that for input tax on entertainment to be deductible under s 17(2)(a)(i), the goods or services must be acquired for making taxable supplies of entertainment in the ordinary course of the vendor's enterprise - not merely incidental to the vendor's actual enterprise. The case also emphasizes that charges for entertainment must be recovered (either from employees or clients) and must cover all direct and indirect costs. This decision is significant for vendors who incur entertainment expenses for employees and seek to deduct input tax, particularly in the construction, mining and similar sectors where temporary accommodation and food for project-based employees are common.