Section 7(1) of the Value-Added Tax Act, 89 of 1991, (“the VAT Act”) levies Value-Added Tax (“VAT”) on the supply of goods or services by a vendor in the course or furtherance of an enterprise carried on by the vendor.  VAT is not a tax on income or receipts, but a tax levied on the supply of goods or services.

In a recently reported case, Case No VAT 889, the Tax Court considered an appeal by a vendor to the disallowance of an objection to an assessment issued by the South African Revenue Service (“SARS”) and the imposition of additional tax of 200%.  The facts of the case are briefly that the vendor knowingly issued tax invoices for fictitious supplies to a close corporation for the purpose of defrauding a bank.  The close corporation obtained financing from the bank based on these tax invoices and also claimed the VAT reflected thereon as input tax, which SARS refunded to the close corporation.  The vendor filed nil VAT returns for each of the periods in which the tax invoices were issued.  The members of the close corporation left the country, and SARS issued VAT assessments to the vendor for the VAT reflected on the tax invoices, and imposed additional tax of 200%.

The Tax Court dismissed the vendor’s appeal on the basis that the vendor had issued the tax invoices, and that section 15(1) of the VAT Act provides that a vendor must account for VAT upon the issue of an invoice.

There is no doubt that the vendor, by issuing the tax invoices on fictitious supplies, assisted the close corporation to defraud the bank and to claim input tax deductions from SARS to which it was not entitled to.  However, the question that arises is whether the SARS was entitled to claim the VAT from the vendor in view of the fact that the vendor never made any supply of goods or services in the first instance.

Sections 59(f) to 59(i) of the VAT Act provide that any person who acts with intent to assist any other person to obtain a refund to which the other person is not entitled, makes use of fraud, art or contrivance whatsoever, or knowingly issues any tax invoice which is in any material respect erroneous or incomplete, or knowingly issues a tax invoice showing an amount charged as tax where the supply in respect of which the tax charged will not take place, or who fabricates a tax invoice knowing the same to be false, shall be guilty of an offence.  The vendor has therefore undoubtedly exposed himself to criminal prosecution by issuing the tax invoices for the fictitious supplies.

Although the vendor has exposed himself to criminal liability, it seems to have been common cause that the vendor did not make any supply of goods or services to which the tax invoices related.  VAT is only levied in terms of section 7 of the VAT Act on the supply of goods or services. 

Section 15(1) as referred to by the Tax Court stipulates that a vendor shall account for VAT on an invoice basis unless the vendor had been granted permission to account for VAT on a payments basis.  Section 9(1) of the VAT Act further provides that a supply of goods or services shall be deemed to take place at the time an invoice is issued by the supplier in respect of that supply or the time any payment of consideration is received by the supplier in respect of that supply, whichever time is earlier.  Section 9(1) therefore stipulates the time when VAT must be accounted for in respect of a supply, and is not in itself a charging section. 

An “invoice” is defined as any document notifying an obligation to make payment.  In view of the fact that no supply took place, the tax invoices issued by the vendor could not notify any obligation to make payment since no such obligation existed.  The issue of a tax invoice for which there is no underlying supply of goods or services made or to be made, can therefore not trigger a VAT liability.

Section 31 of the VAT Act only allows the Commissioner to issue an additional assessment in specific circumstances, none of which include the scenario where a vendor issued tax invoices for goods or services not supplied.  Section 60 of the VAT Act in terms of which the 200% additional tax was levied applies where a vendor does or omits to do anything with intent to evade the payment of VAT payable by him, or to cause the Commissioner to make an improper VAT refund to the vendor.  Since no VAT was payable by the vendor (because no supply was made) and no refund was made to the vendor, the provisions of section 60 also do not seem to be applicable.

SARS was undoubtedly duly entitled to issue an additional assessment and to levy the maximum additional tax on the close corporation which fraudulently claimed the input tax.  There is also no doubt that both the vendor and the close corporation exposed themselves to criminal liability.  But, was SARS entitled to recover the VAT fraudulently claimed by the close corporation from the vendor who issued the tax invoices?  This does not seem to be supported by the VAT Act which provides that VAT is levied on the supply of goods or services, and in the absence of such a supply, no liability for VAT exists.

If SARS is indeed entitled to issue an assessment to one party for the VAT fraudulently claimed by another, then it would mean that the SARS can in principle recover the VAT from both parties, thereby recovering double the tax it lost and four times the tax by way of additional tax!