Capital raising related costs and VAT – Has the High Court thrown Consol Glass a lifeline?

In the recent Consol Glass judgment[1] in the Supreme Court of Appeal (“SCA”), in dispensing with the notion that the borrowing of money could constitute the supply of a debt security, it was held that: “Consol elected to borrow money to acquire the businesses. It did so to carry on the enterprise of selling glass containers. When Consol entered into the refinancing transactions and borrowed moneys from the lending consortium, it remained the same enterprise – a seller of glass containers. It did not become, in addition, a supplier of financial services.”

Clearly, one would venture to say, the relevant costs must then have been incurred to make taxable supplies, as no taxable supplies would have been made by this entity, were it not for the relevant expenditure.

However, in considering the proximity of the expenses and the making of taxable supplies, Unterhalter AJA held as follows: “… [33] It is therefore to the original transaction in 2007, in terms of which Consol acquired its glass manufacturing businesses, that we must look to determine the purpose for which the local and imported services were procured in 2012.” … “ …, the stated purpose of the Eurobond debt was to effect the reorganisation of the Consol group of companies. Nothing of that reorganisation was directed to any change in the making of taxable supplies, that is, in the manufacture of glass. That being so, there was no functional link between the issue of the Eurobonds and the making of taxable supplies. Consol’s initial premise does not hold.”

The intention to restructure the Consol group was clearly that of the ultimate shareholders in the group. Consol Glass, the operating company, was a mere cog in the bigger engine and incurred debt “to acquire the business”, playing its part in the reorganization.

In an earlier article on this case we noted that: “… the SCA appears to attribute the purpose of the shareholder consortium to Consol (the operating company). South African VAT law contains no common purpose doctrine and no group VAT dispensation. The “purpose” that has to be considered must surely be that of Consol itself and not that of its shareholder(s).”[2]

A fleeting thought at the time was whether we had arrived at a question worthy of consideration by the Constitutional Court, being the only higher court of recourse available to Consol for a further appeal.

In an apparent answer to Consol’s prayers, the High Court seems to set the scene in the only just reported PriceWaterhouseCoopers Inc and Another v Minister of Finance and Another[3], where the Court explains the VAT system as follows:

“[31] For purposes of administering the VAT Act, the VAT Act looks at the registered vendor in its individual capacity. The VAT Act does not contain grouping rules or any set-off rules across separate entities. Furthermore, the VAT Act does not require a ‘look through’ principle to determine the tax treatment of transactions.[4]

It escapes the writer how the Constitutional Court could uphold the “look through” principle that seems to have been applied in the SCA. One can only hope that the Consol case finds its way to the highest court in the land, as the introduction, by default, of VAT grouping rules in our law seems untenable and will create, in the words of my erstwhile contract law professor, a morass of uncertainty.

[1] Consol Glass (Pty) Limited v CSARS (1010/2019) [2020] ZASCA 175 (18 December 2020)

[2] https://www.linkedin.com/pulse/consol-glass-case-any-light-shed-capital-raising-vat-chris-eagar/?trackingId=V4ZepRewKjJb3Ad3mbQrsQ%3D%3D

[3] PriceWaterhouseCoopers Inc and Another v Minister of Finance and Another (25705/2019) [2021] ZAGPPHC (2 February 2021)

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