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DEATH & TAXES: FOR WHOM THE BELL TOLLS

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There can be few more mournful sounds than that of a church bell tolling to summon congregants to church for a funeral. In some very old parishes, the bell is tolled for each year of the deceased’s life. Tolling involves pulling the rope so that the bell swings through a short arc, in contrast to ringing it in full swing, joyously. But what, I hear you ask, has this got to do with tax?

At first glance, it might appear difficult to combine churches and taxation and thus justify the title of this column. In practice, many churches have found themselves in an adversarial position with SARS, and the UK Inland Revenue Authorities, usually in connection with alleged non-compliance with PAYE regulations and VAT law. This is understandable, as many bookkeepers work only part-time for the church and are not always equipped to handle complex matters of law interpretation.

Here in South Africa, it is believed that SARS are investigating a specific aspect of some church ministers’ income, namely the Easter Offering. For some years, following an ancient custom in England, it has been the practice in the Anglican church to donate the offertory on Easter Sunday to the church minister. Usually, the amount of the collections that day is recorded in the church records and paid to the minister after deducting income tax as it is clearly remuneration in those circumstances.

However, if a donation is given directly to the a clergyman by a member of the congregation the nature of the transaction is different. It can be argued strongly that it becomes a non-taxable donation and it is surprising that SARS appears to question this. As often happens, there is a litany of persuasive tax cases in England to support the view that in certain circumstances donations to a clergyman at Easter are gifts and not subject to income tax, much the same as gifts at other times of the year, subject of course to the current aggregate South African annual limit of R100 000 per donor.

Clergymen in England appear to be litigious and in Turton v Cooper The Reverend Zouch Turton took his local Inspector of Taxes all the way to the High Court and won. His victory was all the more remarkable because he could not afford legal counsel to represent him and he argued his case in person, very persuasively it seems. He had graduated in law from Oxford University before reading Theology and being ordained. He was assisted by two previous decisions in which the Courts had held that Easter offerings are not taxable in certain circumstances, namely Herbert v McQuade and Slaney v Starkey. In Mr Turton’s case the judge said: “… I quite agree that, if it somehow becomes additional remuneration for his services it is taxable as accruing to him by virtue of his office, notwithstanding that it is so given voluntarily. Here, it seems to me, they, that is the congregation, did not give him anything as additional remuneration for his services but they said: You are a person whose services are in our view inadequately remunerated, true; but we should not care a bit about that if you happened to be a rich man apart from your incumbency. You are not. The incumbency is so poorly paid that it leaves you a poor person. That is the Master of the Rolls’ first case in Poynting v Faulkner where in order to be tax free there had to be an eleemosynary character to the gift…”.

Of course, when it comes to VAT indiscretions, churches usually lose because the VAT authorities in the UK, Europe and New Zealand have sophisticated computer programmes, which ensure that all vendors’ records are monitored and inspected regularly on site. The importance of the church, or the fact that it may be an historic building, holds little sway with the VAT man. Thus, the Dean of Hereford Cathedral found himself in Court. The Cathedral was registered for VAT as helpers operated a restaurant and shop at the Cathedral. They incurred considerable expense in renovating two cottages in the Cathedral cloisters, which were the residences of clergy. The cottages had been built in 1472. The input tax on the renovation costs was disallowed but, on appeal, the Court held that the cost of maintaining a Cathedral that has existed for hundreds of years cannot be met without the finance guaranteed by secular or business activities. In a judgment worthy of King Solomon, the court held that, on the evidence, the relative importance of the business activities and the religious activities was equal, so that 50% of the input tax was deductible.

VAT was introduced in the UK in 1973 and in that relatively short period of time there have been more than 6000 appeals to the Courts and Tribunals by vendors who felt that decisions by the VAT Authorities were unfair. It has to be said that the Authorities were successful in the majority of cases and we hope that SARS is able to emulate its UK colleagues by investigating doubtful claims and eliminating VAT fraud by the unscrupulous.

Consider three English cases taken at random from Tolleys VAT Cases 2006, published by Lexis Nexis Butterworths, and decide for yourself whether the vendors were entitled to claim a VAT input credit for the expenditure.

  • A chartered accountant in public practice was a heavy smoker and each month he bought large quantities of cigarettes for which he claimed a VAT input credit. In court he said that he had purchased the cigarettes in order to give them to his employees and clients for the purpose of maintaining the goodwill of his practice.
  • Two brothers carried on a business in partnership as plumbers. They bought two Rolex gold watches at a cost of £3 000 and reclaimed the input tax. In court, they testified that the watches had been bought for their reliability, durability and ability to withstand heat, vibration and humidity.
  • A farmer bought two Purdey shotguns at a cost of £34 000 and reclaimed the VAT. Purdey shotguns are the crème de la crème and arguably the best in the world.

And the results? In the first and third cases the taxpayers lost outright. In the second case, perhaps surprisingly, the Court allowed a deduction of 25% of the input tax.

Remember. Ask not for whom the bell tolls. The fiscal bell may toll for you. Are you prepared?.

Penelope Webb, who for some years worked in industry, is a former tax partner of a large international accounting firm.