In the recent case of XYZ CC v The Commissioner for South African Revenue Service the Tax Court was required to determine whether XYZ CC should be exonerated from its tax liabilities on the basis that unfair and dishonest practices by external third parties, carried out in a secretive way in order to trick it, led to it incurring the liability.


Mr A was approached by external third parties who proposed that he establish a close corporation, XYZ, to supply seafood products. In turn, the third parties gave an undertaking to A that they would order supplies from XYZ. Based on this agreement, XYZ was duly incorporated, with A being the sole member, and was subsequently registered as a value added tax (VAT) vendor with the South African Revenue Office (SARS).

Subsequent to this, the third parties again approached A and asked him to issue fictitious invoices in the name of XYZ so that they could raise a loan for the purpose of purchasing stock for their business. The third parties gave a further undertaking that they would take care of any tax consequences that may arise from the issuing of the fictitious tax invoices. A duly agreed to this and issued three tax invoices detailing the nature of the fictitious supplies that were allegedly made. The amounts reflected on the tax invoices were inclusive of VAT and were paid by the third parties' bank, being the amount of the loan to XYZ. Also, as agreed, A arranged for the amounts to be paid from the XYZ to the third parties, after which the third parties absconded.

In terms of Section 15(1) of the Value Added Tax Act (89/1991), a taxpayer must account for VAT on the issuing of an invoice, unless it has been granted permission to account for VAT on a payment basis. In this case, XYZ had failed to account for VAT and rendered a nil VAT return for the relevant VAT periods.

As a result of XYZ's failure to account for VAT, SARS raised additional assessments in 2005 in terms of Section 31 of the act. Further, in terms of Section 60, SARS imposed 200% additional tax against XYZ. XYZ objected to the additional assessment and the punitive levies on the basis that A was not aware of the fact that his agreement with the third parties had been entered into for some nefarious purpose. It was further argued that A did not wilfully issue the fictitious tax invoices in the name of XYZ, but rather issued the tax invoices under duress.

Accordingly, the issue for consideration before the Tax Court was the credibility of A's explanation for engaging in the fraudulent action and, in the event that his explanation was credible, whether the XYZ would be exonerated from liability.


The Tax Court held that given A's accounting background, it was arguable that he was well acquainted with and understood the provisions of the act. Therefore, there was no logical explanation as to why he would have participated in the fraud gratuitously and in the process expose himself to criminal and punitive assessments, unless he had participated in the fraud for his own gain.

The court also held that although A argued that he had engaged in the fraudulent activity under duress, technically he could have avoided this fraudulent activity by:

  • withholding the VAT and duly paying it over to SARS; or
  • reversing the invoices by issuing credit notes to the third parties in terms of Section 21 of the act.

In light of the above, the court dismissed XYZ's appeal on two grounds. First, A did not provide a credible account of the circumstances under which he had submitted the fraudulent tax invoices and thereafter a nil VAT return. Second, irrespective of A's explanation, XYZ (and A being the sole member) was patently liable in terms of the act for the VAT and the punitive levies.


The Tax Court's decision is indicative of the fact that in determining the a party's tax liability, SARS will not concern itself with unscrupulous behaviour between the parties to a transaction. Thus, SARS will apply black-letter law in determining tax liability without considering the wider facts, such as fictitious supplies.

For further information on this topic please contact Nicole Paulsen at DLA Cliffe Dekker Hofmeyr Inc by telephone (+27 11 562 1000), fax (+27 11 562 1111) or email (nicole.paulsen@dlacdh.com).

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