1935. Marketing expenditure
A question that often arises is whether expenditure incurred by a vendor should be classified as
'entertainment' for purposes of the Value-Added Tax No. 89 of 1991 (the VAT Act). Where
expenditure is classified as 'entertainment' input tax may generally not be claimed, unless it is an
enterprise that operates within the entertainment industry in the normal course of business.
'Entertainment' is widely defined in section 1 of the VAT Act and means the provision of any food,
beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind by a
vendor whether directly or indirectly to anyone in connection with an enterprise carried on by him. In
itself, the concept of 'entertainment' is sometimes difficult to understand and apply, which is amplified
where an overlapping marketing or advertising purpose is present.
There are numerous scenarios within an enterprise where entertainment and marketing overlap, such
as hosting clients in hospitality suites at sporting events, media briefings for the announcement of a
new CEO or business acquisition, product launches or shareholder meetings where annual results are
presented. At these functions a vendor generally provides refreshments (food and beverages) and
seeks to market its business through branding such as banners, booklets or products. There is no doubt
that the expenditure is incurred for business purposes, however, that is not the test for claiming input
tax under the VAT Act.
An important aspect to bear in mind is that section 17(2)(a) of the VAT Act refers to the denial of
input tax "... to the extent that..." those goods or services are acquired for purposes of entertainment’.
By using the phrase "... to the extent that ...", means that a vendor is at least able to apportion the
expenditure between entertainment and non-entertainment expenditure. This means that an event
(such as a media briefing or hospitality function) must be broken down into its different components
to determine the extent to which a vendor may claim input tax. Expenditure incurred on items such as
banners and booklets would fall outside the definition of 'entertainment', however, the provision of
food and beverages, including the hire of the premises would be regarded as 'entertainment', unless the
vendor is able to provide a scientific apportionment.
An example of where apportionment may be applied is in the case where bottled water, branded in the
name of the vendor, is provided to clients attending any of the events described earlier. The supply of
the water on its own would fall within the definition of 'entertainment', meaning a denial of input tax
on that element. However, the vendor branding on the bottled water could be regarded as marketing or
advertising expenditure. Practically it may be difficult to implement, however, a solution to claiming
VAT on the branding portion at least, is to request the supplier for a split charge on its tax invoice.
With many year-end functions taking place during the final two months of the year, the expenditure
on 'entertainment' is bound to form a substantial part of supplies made to a vendor during the latter
VAT cycles of the year. It is therefore very important to ensure that input tax is claimed correctly so
as to avoid penalties and interest in the event of a SARS investigation.
Cliffe Dekker Hofmeyr
VAT Act: s 1 definition of “entertainment”, s 17(2)(a)