The South African Revenue Service (SARS) issued a binding general ruling of the value-added tax (VAT) implications of securities lending arrangements. It deems that securities lending arrangements constitute “financial services” envisaged in section 2(1)(f). The scrip-lending fee due by the borrower constitutes consideration for an exempt supply, and is therefore not subject to VAT.
Under a securities lending arrangement, the borrower is required to pay to the lender, a “scrip-lending fee” as quid pro quo for the use of the security or instrument during the period, in addition to returning a security or instrument of the same kind and of the same quality.
In the case of a securities lending arrangement, the “scrip-lending fee” does not relate to any other service forming part of the activity of the securities lending arrangement. The fee is only a charge for the use of the security or instrument during the period and therefore represents the amount exceeding the money’s worth that was borrowed, much like interest.
It does not relate to any other service, and therefore, the proviso to section 2(1) does not apply to the scrip-lending fee. The transfer of ownership of the security or instrument is not an independently recognisable supply of goods in the form of the security or the instrument. It is rather considered necessary to give effect to the provision of money’s worth to be part of the activity envisaged under section 2(1)(f). This also applies to the return of the security or instrument at the end of the lending period.
Section 2(1)(f) deems the activity of the provision of credit by any person under an agreement whereby money or money’s worth is provided to another person that agrees to repay in future, a sum or sums exceeding in total, the amount of such money or money’s worth, to be “financial services”.
Based on the above, the securities lending arrangement whereby the security or instrument, being monies worth, is provided to another person who further agrees to pay a scrip-lending fee in respect of the securities lending arrangement, falls within the ambit of section 2(1)(f). Therefore, the scrip-lending fee constitutes consideration in respect of an exempt supply, and is not subject to VAT.