In Case No VAT 1390, heard in the Cape tax court in May 2016, the taxpayer, a food delivery enterprise, argued unsuccessfully that the actual delivery process was not part of its enterprise. In consequence, the court found that the delivery costs were subject to output tax. And in arriving at its decision, in interpreting the legislation the court looked at the economic reality of the taxpayer’s business and applied the legislation in terms of that reality.
The taxpayer, a registered a vendor under the Value-Added Tax Act, 1991, conducted a fast food delivery business. The taxpayer contracted with fast food outlets and takeaway restaurants to advertise their menus in a booklet which it had printed and distributed to households in the areas in which it made deliveries. Typically, a customer would phone the taxpayer and place an order from a particular fast food outlet. The taxpayer would relay the order to the outlet. For the actual delivery, the taxpayer used the services of a group of drivers whom the taxpayer described as independent contractors. When a delivery was due, the first driver in the queue would take control of the order. This person, using private transport, would collect the order from the food outlet, deliver it to the customer, collect the payment in cash or by card, and report to the taxpayer. The tax invoice reflected the price of the meal, to which VAT was added, and an amount described as “Drivers Petrol Money”. VAT was not added to the Drivers Petrol Money, and this was the subject of the dispute between the taxpayer and SARS. The fundamental issue in the appeal was whether the delivery of food orders to the taxpayer’s customers constituted a service supplied by the taxpayer for consideration in the course or in furtherance, of its enterprise.
The taxpayer contended that the delivery process was not part of its enterprise. The driver was an independent contractor conducting a separate enterprise from that of the taxpayer. In other words, the taxpayer was claiming to be conducting a delivery service but was simultaneously contending that it was not making deliveries. The Drivers Petrol Money was a matter between the driver and the customer and the driver was not accountable for it to the taxpayer. It appeared on the invoice solely to inform the customer of the fee payable to the driver for the delivery service.
Unfortunately for the taxpayer, the standard contract between the taxpayer and the “independent contractor” driver was replete with conditions typically found in an employment relationship, such as hours of work and the description of the relationship as “employment”. In addition, the driver had to wear clothing of a particular colour and prominently bearing the name of the taxpayer’s business. The containers for the food were similarly marked and coloured.
The court followed the approach of recent UK decisions in determining the economic reality of the transactions. And this reality was that the taxpayer held itself out as offering a food delivery service, in return for which it received a commission from the food outlet. It was difficult to conceive of a delivery service which did not include delivery. The court commented at Para [29]:
“The UK Supreme Court has recently acknowledged that ‘consideration of economic realities is a fundamental criterion for the application of the … system of VAT …, and … where a transaction comprises a bundle of features and acts, regard must be had to all the circumstances in which the transaction in question takes place’; see Revenue and Customs v Aimia Coalition Loyalty UK Ltd [2013] UKSC 15, [2013] 2 All ER 719 (SC), at para 56. At para 66 of the judgment, Lord Reed underscored the point stating:
I would at the same time stress that the speeches in Redrow should not be interpreted in a manner which would conflict with the principle, stated by the Court of Justice in the present case [ see Commissioners for Her Majesty’s Revenue and Customs v Loyalty Management UK Ltd and Baxi Group Ltd (Joined Cases C-53/09 and C-55/09) [2010] EUECJ C-53/09, [2010] STC 2651], that consideration of economic realities is a fundamental criterion for the application of VAT.”
In light of all the circumstances, the economic reality was that the delivery process was a part of the enterprise and output tax was chargeable on the delivery cost.
Peter Surtees
