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Case Law: De Beers' made a costly R29m input tax mistake - here's how to avoid this happening to you

by , 29 August 2016
Case Law: De Beers' made a costly R29m input tax mistake - here's how to avoid this happening to youA few years ago, some of the De Beers shareholders decided to buy out the rest of the shareholders.

But they first had to get a fair share price. So they employed NM Rothchild & Sons - a London-based financial advisor as well as some local South African professional financial advisors to work this out.

De Beers didn't declare VAT on the international services from Rothchild. And they claimed about R7 million input tax on the VAT charged by the South African service providers - BIG mistake.

Of course SARS wasn't happy about this. They assessed De Beers and slapped them with a VAT bill that came up to R29 million – which included the R7 million they claimed and penalties.
The matter went to the Supreme Court. Read on to find the Court ruling and four things you need to know so this doesn't happen to you.

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SARS vs De Beers' – what were the facts of the case?

SARS said De Beers' shouldn't have claimed input tax on the local services because the services were exempt supplies. SARS also said De Beers were supposed to declare and pay VAT over on the international imported services.
The Supreme Court's ruling
The Supreme Court of Appeal ruled in favour of SARS. It said De Beers was to pay VAT on the 'imported services' and that the VAT on local supplies wasn't claimable as input tax. The Court said the services relating to De Beers shares were for VAT-exempt financial services. The services had nothing to do with De Beers' taxable diamond mining and selling activities.
So De Beers had to pay some R22 million VAT on imported services. And they weren't entitled to claim the R7 million VAT they paid to local suppliers as input tax. 
De Beers also had to pay for both SARS' and their legal costs!
Read on to find out four things you must remember about exempt supplies so you don't land up paying like De Beers.
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Four things you must remember about exempt supplies

Here's why SARS demanded R29 million from De Beers:

1.       Expenses for the share capital of a company are for exempt and not taxable supplies.
2.       De Beers imported services from a foreign supplier. Since these weren't for making taxable supplies, De Beers was supposed to declare VAT on these services.
3.       De Beers also couldn't claim input tax on services supplied by the South African financial experts. This is because this service wasn't for making taxable supplies.
4.       The VAT Law clearly states that financial services are exempt from VAT (Section 12(a)). And the issue or sale of shares a financial service (Section 2(d) of the VAT Act). 
So SARS was right to assess De Beers.
Exempt supplies are complicated! To make it easy for you, I've called on top VAT experts to explain in detail what exempt supplies are and how to deal with the VAT on them correctly. Never make the same mistake De Beers made by turning to chapter E01: Exempt Supplies of the Practical VAT Loose Leaf Service. Get your copy here.
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