Grant or Paid Service? Tax Court Rules on VAT Implications for PBOs
This article will count 0.25 units (15 minutes) of unverifiable CPD. Remember to log these units under your membership profile.
A non-profit company, SLGGM, challenged SARS after being hit with a VAT bill of more than R93 million, plus penalties. The dispute centred on whether payments received from the Gauteng Department of Education (GDE) were grant funding and therefore eligible for zero-rating, or payments for services rendered, which attract 15% VAT. More specifically:
SARS assessed SLGGM for R93,485,660.45 in unpaid VAT.
A 50% understatement penalty was originally imposed but later dropped.
A 10% penalty for late payment—totalling R9,173,442.73—was upheld by the court.
The Services Provided
SLGGM provides school training programmes in leadership, governance, and teacher development. It is a registered Public Benefit Organisation (PBO) and argued that GDE funding was for public benefit work—not in exchange for services.
SARS disagreed, stating SLGGM was effectively a service provider. Evidence included:
Invoices submitted by SLGGM to GDE,
SLGGM described as GDE’s “training delivery arm”,
GDE’s control over budgets and strategic plans,
SLGGM's own accounting treatment showing deferred income until work was completed.
The court agreed with SARS, emphasising that being a PBO does not automatically qualify an organisation for zero-rated VAT treatment. What matters is how the payments are structured and whether they are made for actual services. In this case, even though SLGGM was a PBO, the court found that the payments from GDE were in exchange for services, and thus subject to VAT at the standard rate.
When Does a Payment Count as a “Grant”?
Under the VAT Act, a “grant” is:
A payment from a public body,
Made without expecting goods or services in return.
If the payment is linked to deliverables, invoiced, or controlled through formal agreements, it is not a grant and must be standard-rated for VAT. The court found:
SLGGM had a contractual relationship with GDE
GDE had oversight over spending, plans, and deliverables
SLGGM’s claim that it worked independently was contradicted by its own documents and financial reports.
The Court Verdict
The payments were for taxable services, not grants.
The work delivered was in return for payment, benefiting GDE directly.
Therefore, SLGGM must pay VAT at the standard 15% rate on the full amount.
Final outcome:
SLGGM’s appeal was dismissed.
VAT assessments from 2006 to 2015 were confirmed.
A 10% penalty for late payment was upheld.
No cost order was made against SLGGM.
Key Lessons for PBOs and Service Providers:
Not all government funding is grant funding. If tied to deliverables, it's likely taxable.
Labeling payments as grants won’t help if the relationship looks like a contract.
Issuing invoices and reporting on delivery creates a service provider relationship.
VAT law trumps accounting treatment. How you book the income doesn’t change the tax rules.
Public Benefit Organisations must be careful when contracting with government, misclassifying income can lead to multimillion-rand VAT liabilities.
