Important Notice

This document may be used as a general template to prepare your own opinions and you may issue the opinions under your own name and on your own letterhead. Kindly note though that the opinion has been prepared based on specific facts and circumstances and based on law as it stood at the time of preparing the opinion. Care should therefore be taken to take different facts and circumstances into account when using the opinion. Your service provider accepts no responsibility for the incorrect application of the opinion.  

[Date] 

[Recipient Name]

[Title]

[Company Name]

[Street Address]

[City, ST ZIP Code]

Dear [Recipient Name]:

OPINION

1. We refer to our letter of engagement of [date].

Background

1. Due to a legal case, a company's trade has been temporarily suspended.

Question

1. May the company continue to claim input tax if no business activities are currently carried on?

The VAT Act

1. 4.Section 16(3)(a)(i) of the VAT Act allows a vendor to make a deduction of input tax in respect of supplies of goods and services made to the vendor during a tax period.
2. 5.“Input tax” is defined in section 1(1) of the VAT Act as, amongst others, VAT charged under section 7 of the VAT Act and payable in terms of that section by a supplier on the supply of goods or services made by the supplier to the vendor, to the extent that the vendor has acquired the goods or services for the purpose of consumption, use or supply in the course of making taxable supplies. 
3. “Vendor” is defined in section 1(1) of the VAT Act as any person who is or should be registered in terms of the VAT Act. 
4. 7.Section 23(1)(a) of the VAT Act determines that every person who carries on a VAT enterprise and is not registered as a VAT vendor becomes liable to be registered at the end of any month where the total value of taxable supplies made by that person in the period of 12 months ending at the end of that month in the course of carrying on all enterprises has exceeded R1 million.
5. 8.Section 24(3) of the VAT Act determines that every vendor who ceases to carry on all enterprises must (shall) notify the Commissioner of that fact within 21 days of the date of such cessation. It further determines that the Commissioner for SARS must (shall) cancel the registration of such vendor with effect from the last day of the tax period during which all such enterprises ceased, or from such other date as may be determined by the Commissioner.
6. 9.“Enterprise” is defined in section 1(1) of the VAT Act as any enterprise or activity which is carried on continuously or regularly in or partly in South Africa and in the course or furtherance of which goods or services are supplied to any other person for a consideration.
7. 10.The first proviso to the definition of “enterprise” in section 1(1) of the VAT Act determines that anything done in connection with the commencement or termination of a VAT enterprise or activity is deemed to be done in the course or furtherance of the VAT enterprise or activity.

Meaning of continuously or regularly

1. According to SARS, “continuously” is generally interpreted as on-going, i.e. the duration of the activity has neither ceased in a permanent sense, nor has it been interrupted in a substantial way. The activity does not have to be carried on all the time, but there must be logical progression of the relevant steps needed to bring the activities to conclusion. 
2. The term “regular” refers to an activity which takes place repeated, i.e. when an activity is repeated at reasonably fixed intervals, taking into consideration the type of supply and the time taken to complete the activities associated with making the supply (see Guide for Fixed Property and Construction (VAT 409) paragraph 2.1 and VAT Interpretation Note 70 paragraph 
3. Inland Revenue, New Zealand, explains the terms as follows (see Tax Information Bulletin Vol.7 No 3):

“An activity is ‘continuous’ if there is no significant cessation or interruption of the activity. In other words, it is carried out all the time. Temporary interruptions in the activity for holiday or health reasons, for example, will not generally mean that the activity is not ‘continuous’. An activity is ‘regular’ if it is repeated at reasonable or fixed intervals.”

1. It added that continuously or regularly refers to the activity that will culminate in the supply of goods or services, rather than the actual supply of those goods or services.  Therefore, where a one-off supply has a continuous background, it may still constitute an enterprise for VAT purposes (see Tax Information Bulletin Vol. 7 No. 3).
2. SARS ruled that where a non-resident business supplies salvage services where the ship is physically located in South Africa (i.e. in South Africa’s territorial waters) and the salvage operation was expected to take approximately seven to eight months, the non-resident is regarded as carrying on a VAT enterprise in South Africa due to the continuous and regular nature of the salvage services which are physically supplied in South Africa (see Binding Private Ruling 001). 

Application of the principles 

1. It is common cause that the company is currently a vendor as defined for VAT purposes, being a person registered as such.
2. The issue for consideration is whether the cessation of the enterprise falls within the ambit of section 23(3) of the VAT Act, i.e. whether the company continued to carry on the enterprise after the initial cessation of the activities.
3. The answer to the above enquiry can only be addressed by having regard to the actual facts and circumstances of the case that gave rise to the cessation of the enterprise activities.
4. If the cessation of the activities was temporary suspended pending the outcome of a legal process which would allow the company to continue with its enterprise, there is a potential argument that the expenses were incurred in the course of the enterprise and aimed at making taxable supplies once the legal process has been completed. 
5. If the result of the legal process was however to interdict the company from carrying on its trade indefinitely or for a substantial period, it will be challenging to argue convincingly that the enterprise “has [not] [it] been interrupted in a substantial way”. Under these circumstances we are of the view that the enterprise ceased when the actual activities were discontinued and VAT incurred subsequent to the cessation will not qualify as recoverable input tax, subject to the below.
6. Any VAT incurred in the process of running down/closing the business (for example costs to recover outstanding debts and selling enterprise assets) will continue to be deductible until the process has been completed. 

Tax practitioner opinion

1. We are of the opinion that with regards to the potential imposition of understatement penalties in the unlikely event that SARS take a different view, in terms of section 223(3)(b) of the Tax Administration Act (Act 28 of 2011), your client’s position is more likely than not to 

Conclusion

1. We trust that the above adequately addresses your enquiry. Should anything be unclear though, please do not hesitate to contact us.