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)