It is often mentioned by taxpayers that in their opinion, the South African Revenue Service (SARS) delays the payment of refunds to taxpayers. In light of this observation, the judgment in Top Watch (Pty) Ltd v The Commissioner of the South African Revenue Service (Johannesburg Case No: 2017/4557 and Pretoria Case No: 2016/90099) (judgment delivered on 12 June 2018) is particularly interesting. 

The judgment dealt with the very pertinent and relevant issue of whether the respondent, SARS, was legally justified in refusing to pay certain value-added tax (VAT) refunds to the applicant (Taxpayer), on the grounds that the Taxpayer owed an income tax debt, which SARS alleged was due and payable.

Facts

The Taxpayer claimed that VAT refunds were due to him in respect of the 2014/02, 2014/07, 2014/08 and 2017/07 VAT periods. However, in respect of the 2017/07 VAT period, SARS alleged that no refund was due, but that the Taxpayer owed an amount that the Taxpayer had paid on 29 September 2017. It is common cause that even though SARS concedes that the VAT refunds for the 2014/02, 2014/07 and 2014/08 VAT periods are due and payable, it refuses to authorise payment of the refunds.

Pretorius, a legal specialist employed by SARS, deposed to an affidavit in which he alleges that the Taxpayer has been assessed for an income tax liability of approximately R1.76 million, which far exceeds the refund amounts due to the Taxpayer. To substantiate this allegation, Pretorius relies on the supporting affidavit of Oberholzer, a SARS operational specialist, who says that between 25 November 2016 and 8 March 2018, he audited the Taxpayer for income tax in respect of the March 2012 – February 2015 period and concluded that the Taxpayer owed the amount of approximately R1.76 million. To substantiate this allegation, Oberholzer cites a document attached as POC1, which the court noted is almost illegible. During argument, the court was told that the document is an extract of SARS’ accounting data system of which the heading read “Assessed account – remittance data view”.

Judgment

Based on the facts set out above, SARS contends that is legally correct to refuse to pay the VAT refunds as there has been set-off of the Taxpayer’s income tax liability against the VAT refunds. The Taxpayer argued that SARS’ stance was wrong in law, but argued that SARS’ argument acknowledges that the VAT refunds are due and payable, as this was a precondition for set-off, with which the court agreed.

The court considered the provisions in the Tax Administration Act No 28 of 2011 (TAA) dealing with refunds. Sections 190(1) and 190(2) of the TAA state that SARS must pay a refund if a person is entitled to it under a tax Act and if the amount refundable is reflected in an assessment unless a verification, inspection or audit of the refund is being conducted in terms of Chapter 5 of the TAA.

Based on these provisions, the Taxpayer argued that SARS must pay the VAT refunds and raised two arguments in this regard. Firstly, it argued that the “verification, inspection or audit” referred to in s190 (2), only applies to the “refund” itself and not to all aspects of a person’s tax affairs. Therefore, the outstanding income tax debt cannot prevent payment of the VAT refunds due to the Taxpayer.

Secondly, the Taxpayer argued that no tax debt was established on the papers and in this regard, the court referred to s191 of the TAA. Section 191 states, in relevant part, that if a taxpayer has an outstanding tax debt, an amount that is refundable under s190, must be treated as a payment by a taxpayer that is recorded in the taxpayer’s account under s165, to the extent of the amount outstanding, and any remaining amount must be set-off against any outstanding debt under customs and excise legislation.

The Taxpayer argued that the POC1 document is not an assessment and only an assessment that has been communicated to the Taxpayer is eligible for set-off. In this regard, the court considered s169(1) of the TAA, which states that “an amount of tax due or payable in terms of a tax Act is a tax debt due to “SARS...”. It also considered judgments handed down by the Supreme Court of Appeal (SCA) on what constitutes an “assessment” and what constitutes a “tax debt”. In one of the SCA judgments referred to, it was held that an amount of tax cannot be regarded as having become recoverable through judicial intervention until the taxpayer has been informed of the assessment.

The court held that set-off can only take place where there are debts between persons who have reciprocal debts, which are both due and payable and if both debts are liquidated. As the alleged income tax liability was not captured in an assessment that had been communicated to the Taxpayer, there was no proof that the income tax debt existed and set-off could not take place.

The court concluded that the Taxpayer’s claim for payment of the VAT refunds for the 2014/02, 2014/06 and 2014/08 VAT periods had to be paid by SARS, including interest on these amounts. The court also ordered SARS to pay Taxpayer’s costs.

Comment

It appears from the court’s judgment that had SARS simply issued assessments reflecting the additional income tax liability pursuant to the audit, the Taxpayer’s application would have failed. It is strange that SARS did not issue these assessments before the Taxpayer brought the application, as a period of almost three months passed between finalisation of the audit and the hearing of the application.

The judgment should be seen as a positive by those taxpayers who have often experienced difficulties in getting SARS to pay VAT refunds to them, especially as the delay in paying such refunds often has a very negative impact on those taxpayers’ cashflow positions.