The South African Revenue Service (“SARS”) has set its sights on non-compliant taxpayers through a very active and focused compliance programme. It seems that SARS has realised the enormous powers it enjoys under the Tax Administration Act, 2011 (“TAA”) to administer tax laws and enforce compliance and it has been going from strength to strength ever since. This is particularly evident when it comes to the audit and verification of value-added tax (“VAT”) refunds. But is the law allowing SARS perhaps too much power when viewed against taxpayers’ rights to conduct business?

entitlement vs enforcement

The design of the South African VAT system is such that it entitles a vendor to claim VAT on expenses that have been incurred in the course or furtherance of its taxable enterprise. A vendor’s entitlement to a VAT refund claim is subject to certain requirements and the vendor bears the burden of proof. On the other hand, SARS’ right to conduct an audit of a taxpayer’s tax affairs is embedded in Chapter 5 of the TAA which contains various enforcement tools ranging from verification to audit to criminal investigation. In practice, however, there seems to be difficulty in distinguishing between errant compliant taxpayers and errant criminal taxpayers. The result is that a broad brush approach to enforcement is emerging which is impacting the timing of VAT refund payments with trends reminiscent of the findings from the erstwhile Nugent Commission.

musts vs need nots

Section 190(1) of the TAA requires that SARS “must” pay a refund if a person is entitled to it together with interest thereon. However, section 190(2) provides that SARS “need not” authorise a refund until such time that a verification, inspection, audit or criminal investigation of the refund has been finalised. In other words, the sub-section preserves SARS’ right to initiate and finalise an audit of a refund before the refund is paid out. The trouble is that there is no prescribed time period within which SARS is required to finalise any such audit activities. The TAA is silent on this aspect and the Value-Added Tax Act, 1991 (“VAT Act”) merely provides that interest starts accruing on the outstanding refund if it is not paid within 21 business days from the date on which the particular VAT return was received by SARS. Even so, interest may be suspended in certain prescribed instances (eg if a vendor has any outstanding tax returns, or has not furnished its banking details to SARS, etc).

general audit vs audit of the refund

Notwithstanding that the audit must be “of the refund” before SARS is entitled to withhold payment thereof, section 190(2) of the TAA is often (erroneously) interpreted to mean that SARS is not required to pay a VAT refund if any aspect of that person’s tax affairs is under audit, until such time that the audit has been finalised. This practice has coincided with a recent increase in the use of special “stoppers” on the SARS system which block the payment of any VAT refund claims made by the vendor after the date on which an audit has been initiated, even if such subsequent VAT refund claims fall outside the period that is under audit. This notion has also had the effect that VAT refunds are being withheld on a large scale where SARS is conducting an industry-wide audit as opposed to an audit “of the refund”.

Recent trends noted that support this notion include:

  • Vendors whose VAT returns are frequently in a net VAT refund position will receive a verification request each and every time they submit a VAT return to SARS. The VAT refund will not be paid out until the verification is finalised. This carries on for multiple tax periods without any indication that the vendor is able to build up a good compliance history which could relieve it from constant SARS scrutiny.
  • The initiation of a VAT refund audit will in all likelihood mean that payment of any subsequent VAT refund claims will automatically be withheld until the audit of the initial VAT refund is finalised. When a vendor enquires with the SARS call centre, it is usually informed that a stopper has been placed on the system with no indication as to when the stopper will be lifted or when the audit will be finalised.
  • It has also been noted that a vendor will receive a notification of audit and related request for relevant material in respect of the same VAT returns that were previously subjected to verification requests, even though the verifications were finalised and no adjustments were made.
  • In some instances an audit will be continuously extended to include an additional tax period each time the vendor submits a VAT return to SARS (eg, an audit may start of as relating to VAT refund “A to E” but will be extended to include VAT refund “F” the moment this VAT return is submitted to SARS and so forth).

delayed VAT refund claims

But VAT is a tax on the final consumer. By design, VAT is not intended to be a cost to business. It merely has a cash flow impact where goods or services are acquired by the vendor for taxable business purposes as the vendor is entitled to claim the VAT back from SARS. VAT refund payments are needed to stimulate business activity, but where VAT refunds are continuously locked up in audit activities the much needed cash flow to business is delayed, sometimes for months on end. It is not surprising that vendor frustration is mounting where VAT refund claims are constantly met with suspicion and intensely scrutinised at length.

The current lack of timeframes within which an audit must be concluded creates the impression of a lack of commitment to finalise audits, even where no indication of wrongdoing has been advanced (audits can be kept in abeyance seemingly for years without progression to any kind of end). It seems then that a taxpayer’s only option is to seek recourse from the Courts to either compel SARS to finalise its audit within a reasonable period of time or to pay out any VAT refunds that do not fall within the scope of the audit. In the recent matter of Rappa Resources (Pty) Ltd v C:SARS the High Court cautioned that “SARS cannot be allowed an indefinite time to complete an audit” and, accordingly, the court directed SARS to conclude the audits by no later than a particular date. The Supreme Court of Appeal reinforced this judgment by declining SARS’ application for leave to appeal.

balance of audits and business

The taxpayer may have won this round, but litigation is costly, lengthy and not without risk. It simply is not a feasible option available to all and, in some instances, vendors may not emerge intact on the other side. What is needed instead is a balance, in law, between SARS’ right to conduct an audit and a taxpayer’s constitutional right to conduct business. Clear and reasonable timeframes need to be outlined and extensions should be the exception and only invoked when warranted in limited circumstances.

It is welcoming to note that various stakeholders are currently engaging with National Treasury and SARS in this regard. But until SARS’ powers in this area are curtailed and the balance restored, there will continue to be a tug of war between SARS and taxpayers on the payment of VAT refunds with the vendor at a distinct disadvantage.