- with Inhouse Counsel
A recent Tax Court judgment has clarified the VAT treatment of cashback rewards programmes and allowed input tax deductions to be claimed. In the case (VAT 32666), the court found that a bank was entitled to deduct input tax under section 21(1)(c) of the Value-Added Tax Act 89 of 1991 ("the VAT Act") in respect of its cashback rewards program, where the cashback operated to reduce customers' monthly service fees. Vendors operating similar rewards programs should assess whether the same principles could apply to their own arrangements and unlock potential tax benefits they may currently be overlooking.
Background
The Bank introduced a cashback rewards scheme to protect its market share in a competitive market. Clients holding accounts were charged a monthly service fee (a taxable supply subject to VAT) and could receive a credit of up to 100% of that fee, labelled a "monthly fee rebate" if they met qualifying criteria, including maintaining credit facilities with the Bank and keeping accounts in good standing.
The Bank accounted for output tax on the service fees debited to the client’s account and claimed subsequent input tax deductions when the cashback was credited against that service fee, relying on sections 21(1)(c) and 21(2)(b) of the VAT Act. SARS disallowed the deduction, asserting that the cashback did not constitute a credit note event under section 21(1)(c).
The dispute
The central question was whether the crediting of previously charged banking fees under the cashback scheme constituted a reduction of the "previously agreed consideration", triggering section 21(1)(c) of the VAT Act. The Bank said it was a fee reduction entitling it to an input tax adjustment. SARS argued there were two separate transactions: the banking service (for which the fee was consideration) and a separate and distinct "service" rendered by the client in meeting the qualifying criteria, for which the cashback was separate consideration, not a discount.
The court's findings
The Tax Court rejected SARS's argument as a "conflated interpretation of various unrelated sections of the VAT Act". The key findings were as follows:
Section 21(1)(c) is a purely factual enquiry. It asks only whether the previously agreed consideration was altered by agreement, whether as a discount or "for any other reason". No specific motive is required, and the original service need not itself have changed. The words "for any other reason" are deliberately wide, enabling reductions for reasons unrelated to the nature of the vendor's operations.
No time limitation applies. The section does not prescribe any time period between the original supply and the alteration event; they may be separated in time and place.
The "two transactions" argument fails. Characterising the cashback as payment for a separate supply by the client ignored the principle that evidence must be considered as a whole. The common cause facts and uncontested evidence established a clear causal link between the original fee and its subsequent reduction.
Key takeaways
This judgment confirms that the section 21(1)(c) adjustment mechanism is available whenever a previously agreed consideration is factually reduced by agreement, regardless of the vendor's commercial motivation. Conditional reductions, where the discount depends on a client meeting certain criteria, remain reductions; they do not create a separate supply by the client.
Businesses operating cashback, loyalty or fee-reduction programmes should review their VAT treatment in light of this judgment – if the cash back or fee reduction constitutes a reduction of the previously agreed consideration on the facts, an input tax adjustments may be claimed subject to maintaining adequate documentary evidence (tax invoices and credit notes).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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