In a significant win for taxpayers on the South African Revenue Service’s (Sars) “narrow” approach to the ability to claim input Value-Added Tax (VAT), the Supreme Court of Appeal (SCA) recently ruled in favour of Woolworths Holdings (Woolworths), the group holding company, affirming its right to claim over R8-million in input VAT.

The decision, handed down on Friday, 4 July 2025, not only spares Woolworths millions, but is also a significant development regarding the claiming of input VAT where the issue of a taxpayer’s enterprise activities is under consideration. 

This comes at a time when many taxpayers are facing Sars audits and revised assessments seeking to claw back VAT refunds, sometimes on the basis that no genuine enterprise exists. The Woolworths case signals that Sars cannot cherry-pick transactions in isolation. Courts will look holistically at a taxpayer’s business and purpose, particularly for holding companies whose activities are inherently broad and strategic.

As the judgment clearly states: “A comprehensive consideration of the vendor’s activities is required, rather than isolating a single or a segregated set of transactions. The inquiry is not narrow or restricted. In this case, instead of examining the enterprise holistically, Sars impermissibly isolated the share offer.”

The Dispute: Is Raising Capital an “Enterprise”?

At the heart of the dispute lay Woolworths’ 2014 acquisition of the Australian department store David Jones. To fund the R21.4-billion deal, Woolworths conducted a R10-billion rights offer, essentially issuing new shares to existing shareholders, and incurred significant underwriting fees. Those fees attracted millions of Rands in VAT.

Woolworths claimed a portion, R8.47-million, as input tax, on the basis that the share issue was part of its enterprise as an active investment holding company. Sars disagreed, arguing that Woolworths was not regularly engaged in the business of issuing shares. Instead, Sars viewed the rights offer as an isolated transaction outside the scope of Woolworths’ ongoing enterprise. Sars also disallowed reductions to Woolworths’ output VAT liability for “imported services” and imposed a 10% understatement penalty to the tune of R2.1-million against Woolworths.

SCA: Sars Ignored the Bigger Picture

Delivering a strongly worded judgment, the SCA rejected a “narrow” approach to the consideration of a vendor’s activities. The court confirmed that Woolworths operates as an active investment holding company, not merely a passive investor, and that raising capital is integral to such an enterprise.

“[Sars] ignores a significant portion of the activities conducted by Woolworths Holdings,” the court stated. “The inclusion of the proviso in the definition of ‘enterprise’ demands a holistic consideration of the activities of the entity.”

The court noted that the Value-Added Tax Act, No. 89 of 1991 explicitly includes activities done in connection with the commencement of an enterprise. A once-off capital-raising transaction does not disqualify it from forming part of the enterprise, especially for an investment holding company whose purpose is acquiring and managing subsidiaries.

Judge Nambitha Dambuza noted: “An entity conducting an enterprise as an investment company is entitled to input tax deduction in respect of costs incurred in relation to a rights offer made to shareholders to raise capital for further investment which would increase the value of its investments.”

Critically, the court distinguished this case from the earlier De Beers decision, where costs related to a corporate takeover were held not to form part of De Beers’ mining enterprise. In contrast, the Woolworths rights offer was directly linked to its business of managing and expanding investments.

“The submission on behalf of Sars in this case, that, based on these findings in De Beers, the holding of shares by Woolworths Holdings does not fall within the definition of enterprise, can only be based on a misreading of the judgment of this Court in De Beers.”

Imported Services: A Win for Woolworths

The SCA also ruled that services Woolworths procured from certain foreign underwriters were not “imported services” subject to additional VAT because they were used in the furtherance of its enterprise. This finding spares Woolworths further VAT liabilities and signals important relief for businesses engaging offshore advisers in corporate transactions.

Understatement Penalty Struck Down

The SCA further set aside the 10% understatement penalty imposed by Sars on Woolworths. Sars had alleged that Woolworths relied on a tax opinion from its advisers only after the relevant VAT return had been filed, implying negligence or lack of disclosure. The SCA found no factual basis for Sars’ accusation, noting the opinion was obtained, disclosed timeously and was ultimately correct in law.

While Sars secured condonation for the late filing of its appeal, it was ultimately ordered to pay Woolworths’ legal costs, including the costs of two counsel.

A Broader Message for Taxpayers - and Sars

This judgment lands amid an era of heightened Sars vigilance. In recent years, Sars has shown an increasing appetite for litigation and for disallowing input tax deductions, often scrutinising whether transactions form part of a taxpayer’s “enterprise.” Businesses have seen revised assessments, reversed VAT refunds, and aggressive challenges, sometimes based on arguments that no genuine enterprise exists.

For corporates, especially those planning mergers, acquisitions, or capital-raising, the case is a reassuring precedent. It clarifies that capital-raising costs can indeed qualify for VAT deductions where linked to the vendor’s enterprise, even if the transaction is a once-off.

The ruling sends a clear message that Sars’ litigation zeal cannot override the fundamentals of the VAT system, which, as the court reminded, is meant to tax final consumption, not legitimate business operations conducted in the ordinary course.

Written by Micaela Paschini, Team Lead: Tax Legal at Tax Consulting SA