Removing the Woollies over our eyes …

The notion of what constitutes an enterprise for VAT purposes often causes different views by the revenue authorities and taxpayers. Recently the Supreme Court of Appeal handed down a judgement that not only upset the apple cart but completely reset the enterprise button. This article deals with the impact of the judgement.

Introduction

An enterprise for VAT purposes is any enterprise or activity which is carried on regularly or continuously.

The carrying on of an enterprise/business normally does not cause uncertainty as it is what it is – you can see the business.

An activity is a different kettle of fish; must each individual activity carried on by a VAT enterprise be considered or are all activities automatically included once a person carries on a VAT enterprise?

Not as simple as it seems!

Then came the judgement …

The Judgement

Background

For the technically minded the reference of the judgement is the Commissioner for the South African Revenue Services v Woolworths Holdings Limited (863/2023) [2025] ZASCA 99 (04 July 2025).

Woolworths Holdings Limited (WHL) is the holding company for the companies within the Woolworths group. It has both South African and international shareholders.

While on the acquisition trail, WHL raised capital to acquire a company in Australia. The capital was raised by way of a rights issue offered to the current shareholders. The rights issue was underwritten by a South African underwriter which charged a fee plus VAT for their services. Services were also procured from non-resident professionals.

So the scene is set …

The dispute

SARS contended that the underwriting fees and professional services procured were directly linked to VAT exempt supplies of financial services (the issue of VAT exempt equity share capital). VAT incurred on the expenses were therefore not deductible, and fees paid to non-resident suppliers of professional services subject to VAT on imported services.

SARS further contended that if it could be argued that the issue of the shares to non-residents were zero-rated taxable supplies (which it clearly is), the issuing of the shares must be regarded as a non-enterprise activity being a once-off supply or transaction.

They argued that the business conducted by WHL was that of an investment company and any activity carry on in that regard would be enterprise activities.

Hence the impasse …

The outcome

The court held that the definition of an enterprise demands a holistic consideration of the activities of the entity under consideration.

In the process the court examined the principles established in the De Beers, Capitec Bank and Consol Glass cases, cases that SARS often uses to apply a stratified (not an all-in) approach to the concept of a VAT enterprise.

The court then laid down the law:

“A comprehensive consideration of the vendor’s activities is required, rather than isolating a single or segregated set of transactions. The enquiry is not narrow or restricted. In this case, instead of examining the enterprise holistically, SARS impermissibly isolated the share offer, ignoring the true extent and nature of the enterprise …”

The court endorsed the use of foreign legal precedent. This has been an area often avoided by the courts in the past. The court held:

“However, this case illustrates how the South African economy is linked to economies of the world, and how its tax base is affected by cross-border transactions.”

There you go!

The court lastly endorsed the principle of “a consequential relationship or functional link” between expenses incurred and a VAT enterprise carried on by a VAT vendor. This is a significant move away from the concept of a direct and immediate link between taxable supplies and input tax. It looks like sanity is prevailing at last.

For the income tax gurus, does this not have the ring of the income tax test of a “necessary concomitant” of conducing a trade?

So what does this all mean?

VAT incurred to raise finance

The door is now open to claim input tax on costs associated with raising capital if the nature of the business is an investment company.

But be aware …

The general principle prevails that costs directly attributable to exempt supplies for VAT purposes cannot be claimed as input tax. Where capital is accordingly raised by the issue of equity shares to Africa African shareholders, the denial of the input tax deduction will still apply as the costs will be linked directly to an exempt supply made in South Africa.

What about once-off transactions

The judgement has now established the principle that once a VAT enterprise is carried on, everything done in the course of the enterprise, whether once-off or on a continuous basis, forms part of the enterprise carried on and will be subject to the normal VAT rules.

Unfortunately, no escaping VAT on once-off supplies if you are already registered as a VAT vendor.

Foreign precedent

Although foreign precedent does not constitute law in South Africa, the door is at least slightly open to take note of interpretation by foreign tax jurisdictions. This should always be done with circumspect as the actual legislation may differ.

Summary

The more things change the more they stay the same! This is however a Rubicon judgement which may upset the status quo significantly in the future.