South Africa: When Is A Prepayment Consideration For A VATable Supply?

We recently wrote about the fact that Her Majesty Revenue & Customs ("HMRC") updated their guidance and practice in the United Kingdom regarding the VAT status of forfeited deposits, following a judgment of the European Court of Justice ("ECJ") (ECJ Case C-277/05).

In that case the ECJ held that a deposit paid by a client to an hotelier for the reservation of a room is not subject to VAT when the client does not arrive and forfeits the deposit. The ECJ viewed the forfeited deposits to be fixed compensation for damages suffered by the hotelier because the contract was not fulfilled as agreed, and that the hotelier did not make any identifiable supply of any service to the client.

On 1 September 2011 the Full Federal Court of Australia came to a similar conclusion as that of the ECJ in Case C-277/05 in Quantas Airways Ltd v Commissioner of Taxation [2011] FCAFC 113.

In the Quantas case the Full Federal Court was required to consider whether Quantas received consideration for a taxable supply where a person booked and paid for a domestic air ticket but either cancelled the booking or did not turn up for the flight, and did not collect a refund.

Quantas appealed a decision of the Administrative Appeals Tribunal ("AAT"), which held that Quantas made a taxable supply by holding itself ready to carry passengers, even if it never provided the air travel to the person who booked the ticket.

The Commissioner for Taxation argued that the passenger received a reservation of an air ticket when he made the booking, and that the reservation was the taxable supply for which Quantas received the payment as consideration. However, the Full Federal Court overturned the decision of the AAT and rejected the arguments of the Commissioner. It found that the only relevant supply was the supply of air travel, nothing more or less, and that the supply of the air travel was both the substance and the reality of the transaction, which cannot be split into other supplies. The Full Federal Court therefore found that since the air travel was not supplied, the amount retained by Quantas where the person cancelled the booking or did not turn up for the flight, was not consideration for any taxable supply as no supply was made.

These judgments bring into question the VAT status of all prepayments received by a supplier and which are retained where the goods or services are never supplied. One would need to identify the relevant supply for which the payment was received, and if the supply is never made but the payment is retained, the recipient may not be liable for VAT. Where the recipient accounted for VAT upon receipt of the payment, he may be entitled to a deduction if the supply is never made.

The answer as to whether such retained payments are subject to VAT will normally be in the underlying agreement between the parties and the specific facts of each case must also be carefully considered.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.