When is a customer simply a customer? Cashback incentives, consideration & Section 21 of the VAT Act

By Edlan Jacobs, Associate Director

In 2020 the Supreme Court of Appeal in Consol Glass v CSARS  [2020] ZASCA 175 (18 December 2020) at paragraph 22) stated, with disarming simplicity and clarity, that when an enterprise borrows money, it is supplied a financial service, not the supplier of one. To hold otherwise is to confuse a borrower with a lender. The lender supplies the financial service, and the borrower receives that service.

That same clarity is useful when approaching the Tax Court decision reported as Taxpayer Bank Limited v CSARS VAT 32666 which can be tested against a straightforward question: is there anything here, in substance, beyond the customer simply being a customer?

The facts

The dispute arose in the following factual context:

• The matter concerns an appeal by Taxpayer Bank Limited (the Bank) against additional VAT assessments raised by the South African Revenue Service (SARS) for the tax periods August 2020 to July 2021.
• The Bank is a registered VAT vendor supplying banking services to its clients, in exchange for monthly account fees. These fees constitute consideration for taxable supplies subject to VAT.
• During the relevant period, the Bank introduced a “cashback” rewards scheme as part of its broader pricing and client‑retention strategy in a competitive banking and credit market.
• Under the scheme, clients who met certain qualifying criteria were entitled to receive a cashback equal to a percentage (and in some cases the entirety) of their monthly account fee.
• The qualifying criteria included, among others, the use of specific credit products offered by the Bank (personal loans or vehicle finance) and maintaining accounts in good standing.
• Operationally, the Bank continued to debit the agreed monthly banking fee to clients’ accounts and accounted for output tax on the full amount of those fees.
• Once the qualifying criteria were met, the Bank credited the client’s account with the cashback amount in a subsequent month. On bank statements, this credit was reflected as a “monthly fee rebate”.
• The Bank treated the cashback amounts as a reduction of the previously agreed consideration for the banking services and accordingly claimed an input tax deduction under section 21(2) of the Value‑Added Tax Act 89 of 1991 (VAT Act).
• SARS disallowed the input tax deduction, contending that the cashback did not constitute a reduction of consideration under section 21(1)(c) of the VAT Act.
• SARS’ position was that the crediting of clients’ accounts represented payment for a separate supply by the clients, namely compliance with the qualifying behavioural criteria, rather than a discount or rebate on banking fees.
• The dispute therefore turned on whether the cashback scheme gave rise to a valid credit note event under section 21 of the VAT Act, or whether it involved two distinct supplies with separate VAT consequences.
• The Tax Court had to determine whether the parties had altered the previously agreed consideration for the banking services by agreement, or whether the customers had supplied any separate service to the Bank.

SARS’ argument

• Relying on the statutory definitions of “supply”, “services” and “consideration” in the VAT Act, SARS argued that the relevant arrangements comprised two separate and distinct transactions.
• It contended that the first transaction involved the supply of transactional banking services by the Bank, in exchange for the agreed monthly service fee. That supply, and its VAT treatment, were not disputed.
• SARS characterised the second transaction as a distinct supply made by the client to the Bank. a characterisation the court ultimately rejected as unsupported by the evidence. According to this argument, the client had to perform certain defined actions, described as behavioural compliance or modification, including joining the electronic-cash programme, maintaining an active personal loan with the Bank subject to specified conditions, operating an active transactional account, and ensuring that all accounts remained in good standing with the Bank.
• On this basis, SARS concluded that the cashback payment did not constitute a discount or reduction of the consideration payable for the banking services. Rather, it represented consideration paid by the Bank for a separate supply made by the client.

The Tax Court’s decision

• The court rejected SARS’s argument and held that section 21(1)(c) of the VAT Act does not require any specific motive or justification for reducing previously agreed consideration. An adjustment under this provision does not depend on any change to the original supply. Accordingly, the fact that the underlying banking services remained unchanged was irrelevant (paragraph 18).
• The court confirmed that section 21(1)(c) applies where the consideration for a supply is reduced by agreement with the recipient, whether as a discount or for any other reason. Once this factual requirement is met, the vendor is entitled to an adjustment under section 21(2) of the VAT Act, provided the required credit‑note formalities are complied with. The provision does not require the reduction to occur at the same time as the original agreement, meaning the supply and the reduction may occur separately. Whether a reduction has taken place is a factual matter to be established on a balance of probabilities (paragraph 19).
• It was common cause that clients were contractually liable for banking fees, but the Bank informed them, through advertising and direct communication, that it would reduce those fees if certain conditions were met. Where clients complied and met these conditions, the Bank credited the fees back to their accounts as a “cashback reward”. The evidence showed that this process reduced, or even eliminated the previously agreed bank fees, constituting an agreed alteration of the consideration under section 21(1)(c) with the bank statements reflecting the rebate functioning, on the evidence, as the requisite credit notes (paragraphs 20 and 23.4–23.5).
• The court found that SARS’ argument rested on conflating unrelated provisions of the VAT Act. Section 21(1)(c) is conceptually straightforward and requires a factual enquiry into whether a previously agreed consideration has been reduced by agreement. The attempt to characterise the arrangements as two separate transactions failed to consider the evidence as a whole and instead elevated certain facts while disregarding others. On the facts, the link between the original agreed consideration and its subsequent reduction by agreement was established through undisputed facts and evidence (paragraph 22).

While Tax Court judgments are not binding, they remain persuasive authority and this case provides useful guidance on the interpretation and practical application of section 21 of the VAT Act.

Commentary

• A central difficulty with SARS’s argument is that it characterises ordinary customer behaviour as a separate supply. The conduct on which SARS relied, such as maintaining accounts in good standing, using banking products, or meeting transactional thresholds, was nothing more than customers choosing how to consume the bank’s services in the ordinary course of a customer–supplier relationship. These actions were not performed for the bank (pursuant to any obligation to render services), nor did the customers supply them to the bank as discrete services. Rather, they reflected typical consumer engagement with a service, shaped by commercial incentives. 
• Against this backdrop, SARS sought to elevate this behaviour into a “service” as defined in section 1 of the VAT Act and to treat the cashback credited to customers’ accounts as consideration for that purported supply. This approach stretches the statutory definitions beyond their sensible meaning. It risks confusing how a service is consumed with how a service is supplied. The judgment is consistent with restoring this distinction.
• Where a customer’s conduct merely determines whether they qualify for a benefit, such as a cashback and is not something supplied to the bank, treating that behaviour as a separate taxable supply appears artificial.
• That said, it must be acknowledged that incentive schemes can, in uncommon and carefully structured situations, be structured in a manner that gives rise to a separate taxable supply but this depends on the presence of identifiable, contractually enforceable obligations that go beyond ordinary customer participation. This may occur where customers are contractually engaged to perform identifiable activities of an independent and commercial nature for the supplier, such as structured marketing, referral or data‑generation services, pursuant to an arrangement that goes beyond ordinary customer participation.
• However, this should not be overstated. Ordinary referral rewards, loyalty incentives or cashback schemes typically reflect the manner in which customers are encouraged to engage with or consume a supplier’s services and strengthen customer loyalty, rather than the performance of services rendered to the supplier. The judgment illustrates that incentivised behaviour does not, without more, cross the threshold into a separate supply for VAT purposes.
• Counsel for the Bank submitted that the nature of the supplier’s enterprise may form part of the factual enquiry into whether a separate supply exists. Although the court did not expressly endorse this approach, preferring a more direct interpretation of section 21, the submission remains significant. It aligns with the reasoning of the Supreme Court of Appeal in Consol Glass (Pty) Ltd v CSARS (in paragraphs 19–22), where the court emphasised the importance of correctly identifying the taxpayer’s enterprise which was the manufacture, marketing and sale of glass containers, and this remained its enterprise when it entered into refinancing arrangements. By borrowing money, Consol did not become a supplier of financial services; it remained a recipient of those services.
• Returning to the question: is there anything here, in substance, beyond the customer simply being a customer? Where the answer is no, the VAT analysis should not be strained to suggest otherwise. The decision provides practical guidance, reminding both taxpayers and SARS that VAT analysis must remain anchored in clarity, evidence and commercial reality.

Key takeaway

• The court confirmed that a credit note event presents a factual question that must be proved on a balance of probabilities, supported by proper evidence of a reduction in previously agreed consideration. At the same time, the judgment confirms that SARS may not re‑characterise ordinary conditions of customer participation as a separate taxable supply.
• Taxpayers are encouraged to consult their tax advisors to ensure that the appropriate steps are taken and supported by adequate evidence. BDO is well placed to assist with this process.