Input tax deduction in respect of accommodation and food costs

Section 17(2)(a)(i)(bb) of the Value Added Tax Act, 1991 (VAT Act) provides that a VAT vendor shall not be entitled to deduct any amount of input tax in respect of goods or services acquired to the extent acquired for the purposes of entertainment. This general prohibition applies unless such items are acquired by the vendor for making taxable supplies of entertainment in the ordinary course of an enterprise which supplies entertainment to its employees to the extent made for a charge which covers all direct and indirect costs of such entertainment.

Background

Aveng Mining Shafts and Underground, a division of Aveng (Africa) (Pty) Ltd (Aveng) provided its mining clients with shaft sinking and mining construction activities.

On occasion, Aveng deployed employees to mining sites for limited periods to do work required. These employees were accommodated close to the mines where they work (though not overnight) and were provided with food. Aveng paid the suppliers the amounts charged for such accommodation and food (which qualified as entertainment).

Aveng did not, however, separately charge its clients for these costs (as only an estimate of such costs was included in the overall price at which it tendered to do the relevant work). The estimated costs and actual costs differed. 

The South African Revenue Service disallowed Aveng’s input tax deduction because Aveng did not recover the expenses from its employees.

SCA

The SCA held that a proper interpretation requires that the text, context and purpose be considered simultaneously and holistically. Context, however, is not a license to contend for meanings removed from the text and structure of the provision - context cannot therefore displace the ordinary meaning of the wording of a statute.

The court held that input tax in respect of entertainment is allowed only to the extent determined in accordance with the specific exceptions set out in section 17(2).

In line with the general prohibition, the only amounts of input tax that could be deducted, in respect of entertainment expenses, are those falling within the exceptions listed. This is in line with the principle that exceptions, to a general prohibition, must be interpretated restrictively.

The court held that the issue was not whether the denial did not result in fiscal neutrality (as Aveng contended). Instead, the question is whether a vendor can establish that a particular input tax amount falls squarely within the parameters of the relevant exception.

The SCA reasoned as follows:

“Entertainment is not the enterprise of Aveng. The input tax 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….

But, even assuming that a taxable supply of entertainment is made for a charge in the course of Aveng’s enterprise, Aveng failed to recover the charge from its employees directly. In the alternative, if it would be sufficient for the purposes of the exception, to recover the charge from Aveng’s clients, it failed to establish that what it built into the price charged to clients covered all the direct and indirect costs of such entertainment.”  

Conclusion

Taxpayers should therefore carefully assess whether input tax incurred in respect of entertainment expenses is properly deductible. This entails an assessment of the ambit of the exceptions to the general prohibition and whether a particular amount of input tax falls within it.

Taxpayers should also plan and conduct business arrangements appropriately so as to obtain a favourable tax result.

[1] Aveng Mining Shafts & Underground v The Commissioner for SARS 2025 ZASCA 20 (17 March 2025)