The rules regarding the levying of interest on the late payment of value added tax (“VAT”) are often confusing, and the introduction of the Tax Administration Act, 28 of 2011 (the “TAA”) has contributed to the uncertainty as to the rules that apply.
Levying of interest
The TAA introduced a new interest regime for the levying of interest on unpaid taxes to ensure that the levying of interest is aligned across all taxes.
Section 187(1) of the TAA provides that interest accrues and is payable on the amount of the outstanding balance of a tax debt at the prescribed rate, from the effective date of the tax to the date the tax is paid. The “prescribed rate” is an annual interest rate that the Minister of Finance from time to time fixes by notice in the Government Gazette (currently 9.5%). Section 187(2) of the TAA provides that the interest is calculated on the daily balance owing and compounded monthly. The effective date in respect of the various taxes is described in section 187(3) for each type of tax.
Although section 187(1) of the TAA is in force, it is only applicable in so far as it relates to interest on an understatement penalty and on a tax debt resulting from a jeopardy assessment under the TAA. In terms of Proclamation 51 of 2012 (published inGovernment Gazette 35687 on 14 September 2012), only certain parts of section 187 of the TAA came into force on 1 October 2012 when the TAA was implemented. Proclamation 51 also stipulates that the amendments in schedule 1 of the TAA to any of the provisions of a tax Act relating to interest, shall not take effect.
This means that the interest provisions of the TAA are not yet applicable to the late payment of VAT. The relevant section under which interest is imposed is section 39(1)(a)(ii) of the Value Added Tax Act, 89 of 1991 (the “VAT Act”), which is still in force despite its repeal by the TAA.
Section 39(1)(a)(ii) of the VAT Act provides that interest will be imposed “on the said amount of tax at the prescribed rate”. “Tax” is defined in the VAT Act to mean tax chargeable in terms of the VAT Act, i.e. only the VAT amount. A vendor is therefore only liable to pay interest on the unpaid VAT amount, and not also on any penalty or interest. This is contrary to section 187(1) of the TAA, which provides for interest to be levied on a “tax debt”, which is defined to include the VAT amount and interest and penalties thereon.
Section 4 of the TAA provides that where there is any inconsistency between the TAA and another tax Act, then the other Act prevails. Consequently, where interest on late VAT payments are imposed in terms of section 39(1) of the VAT Act, it can only be levied on the VAT amount, and not also on penalties imposed. Section 39(1) of the VAT Act further provides for the levying of simple interest, as opposed to compound interest as provided for in section 187(2) of the TAA. Although section 39(8) of the VAT Act provides for interest to be levied on the daily balance and to be compounded monthly, it is subject to the Commissioner publishing a notice to that effect in theGovernment Gazette. No such notice has yet been published. Consequently section 39(8) of the VAT Act is not yet applicable and thus simple interest is levied in terms of section 39(1). Section 39(8) of the VAT Act will be deleted when the interest provisions of the TAA come into effect, and compound interest will only be chargeable from such date.
It is SARS' practice to impose interest for a full month during which a VAT amount remains outstanding, even if the amount was paid during the course of the month. There is no basis for such practice in terms of the VAT Act, and interest at the prescribed rate (being an annual rate) should only be levied for the actual period the amount remains unpaid.
Remittance of interest
Section 187(6) of the TAA provides that interest payable may be remitted if the interest is imposed due to circumstances beyond the control of the taxpayer. Such circumstances are limited to a natural or human-made disaster, a civil disturbance or disruption in services, or a serious illness or accident.
The interest is, however, imposed in terms of section 39(1) of the VAT Act, and therefore the interest should also be remitted in terms of the provisions of the VAT Act and not in terms of the TAA.
Section 39(7)(a) of the VAT Act provided the Commissioner with a discretion to remit, in whole or in part, the interest imposed where the failure on the part of the vendor to pay the VAT amount timeously was due to circumstances beyond the vendor’s control. Section 39(7) of the VAT Act was repealed by schedule 1 to the TAA, with effect from 1 October 2012, but not to the extent to which it relates to interest, as provided for in Proclamation 51.
The term “circumstances beyond the control” is not defined or explained in the VAT Act. SARS issued VAT Interpretation Note 61 on 29 March 2011, in which it considered such circumstances to be generally those that are external, unforeseeable, unavoidable or in the nature of an emergency, such as an accident, disaster or illness which resulted in the person being unable to make payment of VAT when due. The Interpretation Note also sets out the procedure that should be followed for the interest to be remitted.
Interest is levied on late tax payments to prevent vendors from delaying the payments of tax to the detriment of the State, and to ensure that it is compensated for the use of money due to the State. It is for this reason that the discretion of SARS to remit interest imposed is limited to circumstances where the taxpayer had no control over the failure to pay the VAT when it became due. However, it often happens under the VAT system that a late payment of VAT that was not charged by a vendor does not give rise to any prejudice to the State due to the fact that such payment, if charged, would have qualified as input tax by another vendor. In these circumstances, the vendor remains liable for interest at the prescribed rate when its VAT position is regularised, but SARS does not have any discretion to remit the interest even though there was clearly no loss to the State.
The lack of discretion for SARS to remit the interest in these circumstances often serves as a deterrent for taxpayers to regularise VAT accounting errors.