By Evádne Bronkhorst, senior manager at Forvis Mazars in South Africa
During VAT reviews, we often encounter vendors claiming input tax deductions for expenditure related to staff welfare, meeting refreshments, year-end functions and client lunches. Vendors contend that the expenditure is business-related and expended for purposes of trade.
Evádne Bronkhorst, senior manager at Forvis Mazars in South Africa. Supplied by Forvis Mazars in South Africa
The chicken or the egg
Whether or not a vendor can claim an input tax deduction depends on whether such vendor carries on a VAT enterprise. The trade of the vendor may provide more details on the nature of the supplies made by the vendor, but a taxpayer can still carry on a trade but not have a VAT enterprise.
Feeling lost? You are not alone. Income tax and VAT terminology often gets muddled up.
The term ‘trade’ is defined in the Income Tax Act No. 58 (1962) (“IT Act”). A wide meaning is attributed to trade. In simple terms, a taxpayer’s trade relates to what the taxpayer does. What business is being carried on?
A VAT enterprise, on the other hand, is specifically defined in section 1 of the Value-Added Tax Act No. 89 (1991) (“VAT Act”). A VAT enterprise requires a trade, but any trade won’t do. It should be a trade that results in taxable supplies of goods or services which exceeds a monetary threshold (currently R1-million). Furthermore, even if a taxpayer carries on a VAT enterprise, this does not guarantee that an input tax deduction can be claimed.
Claiming input tax deductions
Input tax is represented by the portion of the VAT amount paid by a vendor to another VAT vendor, that was paid for goods or services that were acquired for the purpose of consumption, use or supply in the course of making taxable supplies. Any VAT amount that was paid, but which is not attributable to making taxable supplies, cannot be claimed as an input tax deduction.
To claim or not to claim
The provisions of section 17(2) of the VAT Act should be considered when determining the portion of the VAT amount paid that can be claimed as an input tax deduction.
Section 17(2)(a) specifically deals with entertainment expenditure. Section 1(1) of the VAT Act defines ‘entertainment’ as “…the provision of any food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind by a vendor whether directly or indirectly to anyone in connection with an enterprise carried on by [the vendor]…”
Section 17(2)(a) prohibits a vendor from claiming an input tax deduction in respect of entertainment expenditure, unless one of the exceptions applies.
Exceptions to the general prohibition
Where one of the exceptions to section 17(2)(a) apply, a vendor will be entitled to claim an input tax deduction in respect of entertainment expenditure.
Subparagraph (i)(aa) only applies where the goods or services were acquired by the vendor for making taxable supplies of entertainment in the ordinary course of an enterprise that continuously or regularly supplies entertainment to clients or customers. This exception generally relates to vendors in the hospitality industry. If entertainment is not your business, then you have no business claiming an input tax deduction for entertainment expenditure.
Another exception that is commonly relied on is contained in subparagraph (ii). In terms of this exception, an input tax deduction can be claimed for meals, refreshments and accommodation costs where an employee is obliged to spend any night away from his/her usual place of residence and usual working-place by reason of his/her duties.
Where an employee is, for example, required to go to a specific construction or mining site as part of a work project, albeit only for a limited period of time, it may be that the site becomes the employee’s usual working-place. This means that the vendor will then not be entitled to claim an input tax deduction for any meals, refreshments and accommodation costs incurred for the benefit of the employee.
This interpretation was confirmed in Aveng Mining Shafts & Underground v The Commissioner for the South African Revenue Service (1192/2023) [2025] ZASCA 20 (17 March 2025). The Court found in favour of SARS and an input tax deduction in the amount of R17 495 071.81 was disallowed.
The case also commented on subparagraph (i)(bb) and reiterated that, where entertainment is supplied by a vendor to an employee, the input tax deduction can still be claimed if all the direct and indirect costs thereof are recovered from the employee. The Court mentioned that, while indirect recovery of these costs from a client, might tip the scales, the burden of proof remains on the vendor.
Party, but plan
Vendors should be aware that not all input tax deductions in respect of entertainment expenditure are prohibited. However, the exceptions should be carefully considered and the vendor should ensure that the requirements are met. Better planning might ensure that valid business-related entertainment expenditure can qualify for an input tax deduction.
Taxpayers should also remember that just because an income tax deduction can be claimed for certain expenditure, does not imply that an input tax deduction can be claimed.
Contact our Indirect Tax team if you need assistance with any of your indirect tax affairs.