A recent Tax Court judgment has clarified that a post-charge cashback credit can amount to a reduction in the price of a taxable supply for VAT purposes, allowing a supplier to adjust VAT previously accounted for through the mechanism in section 21 of the Value-Added Tax Act.
The Court held that section 21 is triggered where the previously agreed consideration for a supply is altered by agreement with the recipient, and this is a factual enquiry determined on the evidence as a whole.
The judgment, handed down on 18 March, upheld an unnamed commercial bank’s appeal against the South African Revenue Service and ordered SARS to alter an additional assessment to allow an adjustment of R5 551 275.52 for the period August 2020 to July 2021.
The relief arose through a section 21 adjustment: where output tax has been over-accounted for because consideration is later reduced by agreement, the “excess” VAT may be deducted and is treated as deemed input tax under the Act.
Common cause facts
The parties accepted that the bank supplied transactional banking services to clients for a monthly account fee and accounted for VAT on that fee in the ordinary course of business.
During the relevant period, the bank introduced a cashback scheme under which a client could qualify for a partial or full rebate of the monthly fee if certain criteria were met, including holding additional products with the bank and keeping the account in good standing. Where a client qualified, the bank credited part of or all the fee back to the client’s account.
Issue in dispute
The dispute turned on how that credit should be characterised for VAT purposes.
The bank’s case was that “there was a reduction of the agreed monthly service fee”, while SARS contended it was “not a reduction of the monthly account fee, but rather a payment to incentivise [the bank’s] clients”.
The question for the Tax Court was therefore whether the crediting of previously debited fees under the cashback scheme triggered section 21 of the VAT Act, entitling the bank to adjust VAT previously accounted for.
‘Two transactions’ argument
SARS’s position developed into a “two transactions” argument.
On this view, the first transaction was the ordinary supply of banking services for a monthly fee. The second, SARS argued, was a separate arrangement in which customers performed behavioural actions – such as maintaining qualifying products and account status – and were then effectively “paid” by the bank for doing so. On this characterisation, the cashback did not reduce the price of the banking service but constituted consideration for a separate supply allegedly made by the customer.
The judgment also records that SARS’s initial audit stance appears to have reflected a misunderstanding of how an “electronic-cash” component related to the cashback scheme. SARS later conceded that misunderstanding and narrowed its case to the contention that the credit did not constitute a section 21 credit note event, while advancing the two-transactions argument at the hearing.
Interpretation of section 21
Judge Petrus van Niekerk rejected SARS’s approach, describing it as “a conflated interpretation of various unrelated sections of the VAT Act”.
Section 21(1)(c) provides that the adjustment mechanism applies where “the previously agreed consideration” for a supply “has been altered by agreement with the recipient, whether due to the offer of a discount or for any other reason”.
He emphasised that the provision “does not require any specific motive or stated reason” for reducing the consideration. Furthermore, section 21 does not prescribe any period between the original charge and the later adjustment: the agreed consideration and the alteration event may be separated in time and place.
The jurisdictional requirement is therefore “a factual enquiry” to be established, on a balance of probabilities, by admissible evidence. Judge Van Niekerk said the evidence must be considered as a whole and rejected an approach that isolates particular features of an arrangement while ignoring others.
Once the factual trigger exists, the taxpayer must also satisfy the administrative requirements that accompany the section 21 mechanism.
Applying the test: why the bank succeeded
On the evidence, the Court found that the bank had established the jurisdictional and administrative requirements for a section 21 adjustment.
The Court accepted that:
- there was an agreement under which a monthly banking fee was charged;
- the bank accounted for VAT on that fee and provided VAT-compliant documentation, with monthly statements constituting tax invoices;
- clients were offered a reduction of that fee if specified criteria were met; and
- the reduction was implemented by crediting the fee, in whole or in part, back to the client’s account.
An aspect of the case was the role of the bank statement. The judgment records that the monthly statement was compliant with section 20 and constituted a tax invoice, and the rebate reflected on the statement constituted the relevant credit note for purposes of the section 21 process.
On that evidential footing, Judge Van Niekerk concluded that the arrangement amounted to a reduction of the previously agreed consideration by agreement with the customer, rather than consideration for any separate supply by the customer.
The appeal was upheld and SARS was ordered to alter the additional assessment accordingly.
Lessons and implications
Gerhard Badenhorst, a director in Cliffe Dekker Hofmeyr’s tax and exchange control practice, said the judgment should assist in dealing with SARS’s “ongoing attempts” to disallow VAT deductions on discounts, rebates, and other consideration adjustments by asserting that they “do not comprise a credit note event” under section 21(1)(c).
Badenhorst also highlighted that SARS’s “two transactions” argument – in which cashback credits were characterised as consideration for “services” allegedly rendered by customers – was rejected by the Court as “a conflated interpretation” of the VAT Act.
In its commentary, Mayet & Associates said the judgment has implications for businesses where rebates and incentives are common, including banking and financial services, telecommunications, retail loyalty programmes, and subscription-based service models. It noted that such structures “may qualify as VAT-adjustable events where they result in a genuine reduction of consideration”.
The commercial motivation behind the reduction “is not relevant” to the application of section 21; what matters is whether the agreed price “has in fact been altered”.
Mayet emphasised the importance of maintaining proper documentation and supporting evidence, noting that entitlement to VAT deductions remains subject to proof of compliance with substantive and administrative requirements.
It said the judgment also “signals that attempts to recharacterize discounts as separate supplies are unlikely to succeed”, particularly where “the substance of the transaction reflects a pricing adjustment”.
Although decided in a banking context, the Tax Court’s reasoning is likely to be instructive for other sectors where post-supply rebates alter the amount ultimately charged. The outcome will, however, remain dependent on the facts of each case.
Click here to download the judgment.
