A recent judgment of the Supreme Court of Appeal (SCA) has highlighted the Value Added Tax (VAT) risks for grant recipients, especially in the context of ‘conduit’ payments to be distributed to third parties. Although the judgment deals with procedural issues only, it demonstrates that one cannot assume that grants will always be VAT neutral.

In this case, the taxpayer (Free State Development Corporation) was tasked with the development of a special economic zone in Harrismith (Free State). In terms of the funding agreements with the Department of Trade and Industry, the taxpayer had to manage the grant funds and monitor the implementation of the project.

The taxpayer zero-rated the grants but SARS disagreed, issuing additional assessments for approximately ZAR 39 million.

Where a taxpayer receives a conduit grant, VAT neutrality could be achieved in more than one way. For example:

• if the taxpayer does not receive the funds for its own use, the payment should not constitute gross income or consideration for VAT purposes; or
• if the supply is a deemed supply in terms of section 8(5) of the VAT Act and if the taxpayer is not a designated entity, the supply could be zero-rated; or
• where the grant recipient renders a service, the supply would be subject to VAT, but the taxpayer could claim the VAT charged by its sub-contractors as input VAT.

In this case, the taxpayer argued that the grants qualified for zero-rating and that it was a mere conduit for the funds, gaining no financial benefit upon which VAT could be levied. The judgment dealt with whether the taxpayer should be permitted to replace its original ‘Statement of grounds of appeal’, which the SCA agreed to, to enable ‘the true issue between the parties to be ventilated’.