On 7 December 2021, the Supreme Court of Appeal (“SCA”) handed down judgment in Purveyors South Africa Mine Services (Pty) Ltd v Commissioner for the South African Revenue Services (Pty) Ltd[1], where the court had to determine whether a taxpayer who elects to inform the South African Revenue Service (the “SARS”) of its tax defaults informally, may utilise the Voluntary Disclosure Program (the “VDP”). The SCA, in deciding against the taxpayer, held that there can be no prior knowledge on the part of the SARS of a tax default, regardless of whether the source of such prior knowledge is the taxpayer, in order for a defaulting taxpayer to comply with the requirements of section 227 of the Tax Administration Act, 28 of 2011 (the “TAA”) in relation to a valid voluntary disclosure.
In Purveyors, the taxpayer leased an aircraft that was registered in the United States of America. The lease agreement allowed the taxpayer to operate air charter services for the benefit of a mining company in the Democratic Republic of Congo (“DRC”) and, from January 2015, the taxpayer supplied air charter services for flights from Johannesburg to Lubumbashi and Kinshasa in the DRC. Whilst the aircraft was not in use, it was kept at a leased hangar at O R Tambo International Airport.
On 30 January 2017, the taxpayer requested a meeting with the SARS to ‘regularise the VAT that was supposed to be paid over’ and informed the SARS that it had just received a VAT technical opinion from PwC that it was supposed to pay VAT over to the SARS upon the import of the aircraft. The SARS responded by stating inter alia that import VAT needed to be paid and that the aircraft was subject to penalty implications.
Following numerous exchanges of correspondence over a number of months, in May 2017 the SARS indicated that the taxpayer had been allowed enough time to regularise its tax affairs and the matter had to be addressed. Notwithstanding PwC’s opinion provided to the taxpayer in January 2017 advising the taxpayer to honour its tax obligation in relation to its historical tax liability, the taxpayer obtained a further opinion from PwC. In the latest opinion, PwC agreed with the SARS that the taxpayer was obliged to pay import VAT as well as penalties and interest.
Almost a further year passed and the taxpayer did nothing to regularise its liability for VAT and penalties. Interestingly, the SARS also did not take any steps to collect the outstanding tax, penalties and interest. Then, on 4 April 2018, the taxpayer applied for voluntary disclosure relief in terms of section 226 of the TAA. The SARS however rejected the taxpayer’s application on the basis that the disclosure was not voluntary and did not contain facts of which the SARS was unaware, as required in terms of section 227 of the TAA.
The Tax Court found that the VDP application was not voluntary as there was an element of compulsion on the part of the taxpayer when it submitted the application. The issue which the SCA had to decide on appeal was whether the taxpayer’s VDP application was in fact ‘voluntary’ as required by section 227 of the TAA.
The court reasoned that the purpose of a VDP was ‘to ensure that errant taxpayers who are not compliant must come clean, out of their own volition and without any prompting, to make amends in respect of their defaults by informing SARS’. An errant taxpayer may not obtain informal tax advice from the SARS, and when this advice does not suit them, apply for VDP relief.
The court accordingly upheld the SARS decision to reject the taxpayer’s VDP application on the basis that the informal discussions between the taxpayer and the SARS regarding its default meant that their subsequent VDP application was not made voluntarily as the SARS was already aware of their default on the date of the application.
The Court has accordingly confirmed that the VDP program is only open to a taxpayer who has declared their tax non-compliance to the SARS in the prescribed form and manner. Should a taxpayer informally disclose their non-compliance to a SARS official prior to making a VDP application, this will create a bar to the taxpayer utilising the VDP program.
The lesson to be learned from the judgment of the SCA is that a taxpayer should be very careful before approaching the SARS informally to request an opinion, or to just discuss, their tax affairs or to disclose non-compliance. Should a taxpayer be of the view that they are non-compliant in relation to their tax affairs, the first step should always be to approach a tax practitioner for advice as to the correct procedure to be followed in order to regularise their affairs with the SARS and thereafter disclosing the relevant non-compliance in the prescribed form and manner to obtain VDP relief. As was made clear in Purveyors, utilising the incorrect procedure can be very costly.
This bulletin was prepared by partner Conor McFadden, associate Johan Coertze and candidate attorney Wesley Fletcher.
[1] [2021] ZASCA 170.
