22 January 2021 by Tax and Exchange Control Alert

VAT and vouchers: A recent High Court decision

The VAT implications of vouchers may, on the face of it, seem to be of little significance and straightforward. However, VAT on vouchers has been the subject of a significant amount of litigation in the United Kingdom and the European Union. New Zealand has amended its VAT legislation twice in this regard and the United Kingdom substantially amended its VAT rules on vouchers from January 2019. SARS issued two draft interpretation notes during 2012 on the subject but neither have been finalised. It is therefore somewhat surprising that there have been very few VAT disputes in South Africa in relation to vouchers.

The VAT considerations applicable to vouchers

The problem with a voucher is that it is a prepayment for a later supply of goods or services on the redemption of the voucher. There is only a single consumption for a single consideration, but there are two transactions, i.e. the sale of the voucher and the subsequent supply of goods or services. If both the transactions are taxed, then it will give rise to double taxation since there is only one consideration. To avoid such double taxation, the VAT Act contains provisions which are specific to vouchers.

Section 10(18) deals with vouchers which grant the holder the right, in return for the payment of a consideration in money, to receive goods or services to the extent of the monetary value stated on the voucher. The voucher holder determines the goods or services to be acquired, and there is often more than one supplier to choose from. Since the nature, value or VAT status of the goods or services (whether they are standard rated, zero rated or exempt) cannot be determined upfront, no VAT is payable when the voucher is sold. VAT is only payable when the voucher is redeemed for goods or services, and then only on the value of the goods or services supplied. In terms of the Explanatory Memorandum on the Value Added Tax Bill, 1991, a section 10(18) voucher is regarded as a means of exchange, similar to money. Gift vouchers typically fall into this category.

Section 10(19) deals with vouchers issued for a consideration in money which entitle the holder to receive the goods or services specified thereon without any further charge. The VAT on these vouchers is payable when the vouchers are issued because the nature and VAT status of the goods or services are known when the voucher is sold, and no VAT is payable when the voucher is redeemed. Tickets entitling the holder entry to a specified sporting or entertainment event, a spa voucher entitling the holder to a specified treatment and prepaid electricity vouchers typically fall into this category.

The main difference is therefore that no VAT is accounted for when a section 10(18) voucher is issued, and VAT is only accounted for on the value of goods or services supplied when the voucher is redeemed, whereas, in the case of a section 10(19) voucher, VAT is payable on the full consideration when the voucher is issued, and no VAT is payable when the voucher is redeemed for goods or services.

High Court judgment

The High Court was recently called upon in the case of MTN (Pty) Ltd v CSARS (79960/2019) [2021] ZAGPPHC to determine whether prepaid vouchers issued for a consideration, entitling the holder to receive any services or products to the value of the monetary value attributed to the voucher on the MTN mobile network as selected by the holder (multi-purpose vouchers), comprise section 10(18) or 10(19) vouchers.

MTN applied in November 2017 to SARS for a binding private ruling to confirm that its multi-purpose vouchers fall within section 10(18). However, SARS ruled in April 2019 that these vouchers are section 10(19) vouchers. MTN then sought a declaratory order from the High Court that the multi-purpose vouchers indeed fall within section 10(18). As has seemingly become its standard practice in such cases, SARS firstly disputed the entitlement of MTN to declaratory relief. SARS argued that MTN was asking the court to advise it on which section of the VAT Act should be applied. SARS argued further that the court was requested to make a determination on general terms, that it was not time specific and that there were not sufficient facts upon which a determination could be made.

In the judgment handed down on 12 January 2021, Hughes J confirmed the entitlement of MTN to seek declaratory relief. In relying on the judgment of the Supreme Court of Appeal in CSARS v Langholm Farms, he stated that nothing would change SARS’ interpretation of this specific section and no amount of further facts or information would alter SARS’ legal view. In these circumstances, a declaratory application is appropriate.

Turning to the application of section 10(18) and 10(19), the court considered that the vouchers are prepaid vouchers which allow the subscriber access to any of MTN’s services. When the subscriber purchases and activates the multi-purpose voucher, the subscriber’s SIM card is credited with the value of the voucher. This is described as the ‘main wallet’ which can then be used to acquire any product or service on the MTN network at the choice of the subscriber. Once a particular product or service is accessed, the cost thereof at the prevailing tariff is deducted from the main wallet.

The court stated that the multi-purpose voucher is described as an “airtime” voucher. The “airtime” voucher can be used to make calls, receive calls, send messages, use the internet and for data. It is this “airtime” which the court regarded to be a specific good or service as contemplated by section 10(19), which can then be used for multiple purposes. The court therefore held that the voucher is for specified goods or services and is therefore a section 10(19) voucher.

A deeper dive – analysis and practical implications of the judgment

It is not clear whether the court considered the judgment of the Tax Court in Income Tax Case IT 24510. In that case Binns-Ward J ruled that pre-paid vouchers are regulated by sections 63 and 65 of the Consumer Protection Act 68 of 2008 (CPA). Section 63(3) of the CPA provides that any consideration paid by a consumer in exchange for a prepaid voucher is the property of the bearer of that voucher to the extent that the recipient has not redeemed it in exchange for goods or services. Section 65(2)(a) of the CPA provides that the supplier must not treat the prepayment as being the property of the supplier. On this basis the Tax Court held that it is only when the voucher is redeemed or expires that the sale proceeds of the voucher accrues to the taxpayer, for it is only then that the taxpayer becomes legally entitled to the proceeds. The Tax Court therefore held that the proceeds are not gross income for income tax purposes until the voucher is redeemed or expires. The same principles should also apply in a VAT context.

MTN argued that the sale proceeds of its multi-purpose voucher only comprise revenue when the voucher is activated and used. Hughes J stated that this contention is not correct because section 9(1) of the VAT Act requires MTN to account for VAT in the tax period in which the voucher is sold. This is, however, incorrect on two counts. Firstly, if it is a section 10(18) voucher, then the supply of the voucher is disregarded for the purposes of the VAT Act. There is then no supply which triggers the time of supply in terms of section 9(1). Secondly, the time of supply in terms of section 9(1) is triggered at the earlier of when an invoice is issued or the time any payment of consideration is received by the supplier. Assuming no invoice is issued in respect of a prepaid voucher, VAT is then only payable when payment of consideration is received by the supplier. Section 63(3) of the CPA provides specifically that any consideration paid for a prepaid voucher is the property of the bearer of that voucher to the extent that the supplier has not redeemed it in exchange for goods or services. Section 65(2)(a) of the CPA further places prohibition on the supplier to treat such prepayment as the supplier’s property. The consideration paid for the multi-purpose voucher is therefore not a consideration received by the supplier which triggers the time of supply under section 9(1), as it remains the property of the bearer.

The judgment in the MTN case also has further implications. One of the reasons why section 10(18) delays the VAT payment until the voucher is redeemed, is because the nature of the goods or services, and whether they are standard rated, zero rated or exempt cannot be determined at the time the voucher is sold. In the case of MTN, the current products or services for which the multi-purpose voucher can be used are all standard rated. However, if MTN adds zero rated, exempt or non-taxable options for which the main wallet can be applied, for example to make a donation to a charity or to pay a credit life insurance premium, such non-taxable transactions will be subject to VAT because the multi-purpose voucher is now ruled to be a section 10(19) voucher. A further question that arises is who should pay the VAT, and when, if a multi-purpose voucher such as the MTN voucher is issued by a third party. What would the position be if a third party issues a multi-purpose voucher which can be redeemed for services or products provided by multiple service providers?

The judgment in the MTN case leaves us with more questions than answers on the complex subject of VAT and vouchers. The provisions of the VAT Act which deal with vouchers were included in the VAT Act when VAT was introduced almost 30 years ago and have not been amended since. The VAT Act has not kept up with the rapid expansion in digital technologies and the proliferation in business promotion initiatives involving vouchers. Perhaps now is the time to review and amend these provisions. 

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