The High Court has ordered Britam Insurance to pay Capital Shopper Shs572.3 million after finding that the contractor it guaranteed for the construction of the Kampala Marriott Hotel wrongly charged Value Added Tax (VAT) twice on part of the project.
Justice Patricia Kahigi Asiimwe ruled that Britam was liable because it had guaranteed an advance payment made by Capital Shoppers to Guangdong Hao He Engineering and Construction Company, the contractor hired to build the hotel and the Marriott Executive Apartments.
The court also found that the contractor charged VAT on construction work without accounting for tax already included in the advance payment.
Besides the VAT refund, the court awarded Capital Shoppers Shs30 million in general damages, plus interest and costs.
The dispute arose from a construction agreement signed on November 1, 2018. To help the contractor mobilise workers and equipment, Capital Shoppers advanced it an interest-free mobilisation loan of Shs8.34 billion, to be recovered through deductions from payments as work progressed.
Britam issued an Advance Payment Bond of the same amount on November 23, 2018, guaranteeing repayment if the contractor failed to meet its obligations. Britam said it also issued a Performance Bond worth Shs4.17 billion.
The relationship later broke down after the contractor allegedly breached the agreement. Capital Shoppers terminated the contract and demanded repayment of the outstanding loan.
The contractor had submitted eight Interim Payment Certificates (IPCs), documents showing the value of work completed and the amount payable. Capital Shoppers paid all eight but said it had recovered only Shs2.67 billion of the advance.
It was first put at Shs5.67 billion, later revised to Shs4.06 billion after reconciliation. Of that, Shs3.49 billion represented the value of work done, while Capital Shoppers said Shs572.5 million was VAT that had been wrongly recovered.
In settlement talks, Britam agreed to pay about Shs3.49 billion but rejected liability for the VAT. It argued the tax was not recoverable under the bond and was a matter between the contractor and the Uganda Revenue Authority (URA).
Capital Shoppers sued, seeking the money, general damages, interest and costs. It was represented by Kampala Associated Advocates, while Britam was represented by Nampandu, Mugwanya, Muwawu & Co. Advocates.
Capital Shoppers called Moses Muwonge, director of Operations at Image Design and Build Limited, the firm appointed to supervise daily construction.
He told the court the loan was advanced on November 15, 2018, to be repaid through deductions from the certificates, but the deductions did not fully recover it.
Reconciliation, he said, showed the contractor had wrongly recovered Shs572.5 million in VAT.
Britam called tax consultant Samuel Semugenyi, who argued VAT was correctly charged on the gross value of work certified.
Under the VAT Act, he said, tax becomes due when an invoice is issued, or payment received, whichever comes first, and deductions for retention and advance recovery did not reduce the value of services supplied.
He added that any error was a matter between the contractor and URA, since only the contractor could amend its VAT returns.
Britam’s position was that no overpayment had occurred and that its obligation was limited to guaranteeing repayment of the advance.
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Justice Asiimwe rejected those arguments after examining the contract, the project’s financial breakdown and the wording of the bond.
She found the advance payment already included VAT, noting that the bond described it as “being 20% of the agreed Contract Sum including VAT”.
She also relied on a breakdown by Turner and Townsend, which valued the work completed before termination. It put the total contract price at Shs41.73 billion: Shs33.93 billion net, Shs1.70 billion contingency and Shs6.11 billion VAT.
Justice Asiimwe said this contradicted Capital Shoppers’ argument that the advance was exclusive of VAT.
“The payment of $ 2,062,040.47 represents approximately 20% of the total contract price inclusive of VAT, with a negligible variance of only USD 891. Therefore, the advance payment covered VAT for 20% of the contract works,” she ruled.
Examining the contractor’s tax invoices, she found that it deducted the advance from each certificate but still charged VAT on the gross value of the works.
“This was double payment of VAT since the advance payment included VAT,” she stated.
On Britam’s liability, she held: “Under the advance payment bond, [Britam] undertook to act as surety for the payment of the money that had been advanced to the contractor. That money included VAT. [Britam] is therefore liable to pay [Capital Shoppers] the VAT that was wrongly charged by the contractor.”
Capital Shoppers had asked for Shs50 million in general damages, saying it lost time and money because of the contractor’s breach. Justice Asiimwe agreed it deserved compensation but reduced the figure to Shs30 million.
The principal award is about Shs602.3 million. Britam must pay interest on the VAT refund at eight per cent a year from July 8, 2020, until full payment.
The general damages attract 18% per annum from the date of judgment. Britam was also ordered to pay the costs of the suit.
