A prominent mining construction group has suffered a defeat in its attempt to deduct VAT for entertainment expenses, reports Fin24.

The SCA has dismissed a legal bid by Aveng Mining Shafts & Underground to compel SARS to allow it to deduct some R17.5m in VAT paid in relation to accommodation and food expenses.

The group is a leading shaft-sinking company and one of only four deep-level shaft-sinking companies worldwide.

Aveng had argued that it should be allowed to deduct the input VAT it was charged on accommodation and food expenses which it incurred in deploying employees to specific projects. In submitting its VAT returns for the period spanning mid-2012 to mid-2016, Aveng claimed input tax amounting to almost R17.5m in respect of these entertainment expenses.

Having failed in this aim in the Tax Court, the group took the matter to the SCA. It argued that the VAT deduction should be permitted because the expenses were factored into tender pricing for the mining projects, and were therefore indirectly recovered from its clients.

The company noted the Value Added Tax Act allows for deductions when entertainment expenses were charged to employees or where all direct and indirect costs were covered.

Aveng further argued its business should not bear VAT input costs where it makes ‘taxable supplies’.

This refers to provisions within the Act which do allow for deductions in respect of goods or services acquired by the vendor for making ‘taxable supplies of entertainment’ in the ordinary course of an enterprise. 

SARS however argued expenses for food and accommodation fell within the definition of ‘entertainment expenses’ and that Aveng was not engaged in the business of making taxable supplies of entertainment, meaning the claimed deductions did not qualify under the relevant provisions.

It also pointed out Avenge did not directly charge employees for these direct and indirect costs, nor did it conclusively prove that its tender pricing fully covered all expenses related to food and accommodation.

SARS emphasised that the Act’s restrictions on entertainment deductions serve as a legislative safeguard against potential tax abuse, according to Fin24.

The SCA sided with SARS, concluding that Aveng’s entertainment expenses did not qualify for deductions.

‘Entertainment is not the enterprise of Aveng. The input tax incurred was not in respect of goods and services acquired for making taxable supplies of entertainment by Aveng. They were acquired, at best for Aveng, in respect of making taxable supplies of sinking mining shafts and related mining work. That is Aveng’s enterprise,’ the ruling said.

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