VAT liability for fictitious supplies
24 August 2012
Posted by: SAIT Technical
By Nicole Paulsen (DLA Cliffe Dekker Hofmeyr Tax Alert)
XYZ CC v The Commissioner for South African Revenue Service
In the recent decision ofXYZ CC v The Commissioner for South African Revenue Service, the Tax Court was required to determine whetherXYZ CC(taxpayer) 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 the taxpayer, led to the taxpayer incurring the liability.
By way of a general background, a certain Mr A was approached by external third parties, who proposed that he establish a close corporation (the taxpayer) with the business of supplying seafood products. In turn, the third parties gave an undertaking to Mr A that they would order supplies from the taxpayer. Based on this agreement, the taxpayer was duly incorporated with Mr A being the sole member, and the taxpayer subsequently registered as a VAT vendor with SARS. Subsequent to this, the third parties again approached Mr A and asked him to issue fictitious invoices in the name of the taxpayer as it was needed in order to 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. Mr A duly agreed to this and issued three tax invoices detailing the nature of the ficticious supplies 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 the tax payer. Also, as agreed, Mr A caused the amounts to be paid from the taxpayer to the third parties, after which the third parties absconded.
Accordingly and in terms of s15(1) of the VAT Act, No 89 of 1991 (Act), a taxpayer has to account for the VAT on the issuing of an invoice unless it had been granted permission to account for VAT on a payment basis. In this case, the taxpayer had failed to account for VAT and rendered a nil VAT return for the relevant VAT periods.
As a result of the taxpayer's failure to account for VAT, SARS raised additional assessments in 2005 in terms of s31 of the Act. Further, in terms of section 60 of the Act, SARS imposed 200% additional tax against the taxpayer. The taxpayer objected to the additional assessment and the punitive levies on the basis that Mr A was not aware of the fact that the agreement between himself and the third party was entered into for some nefarious purpose and further, it was argued that Mr A did not wilfully issue the fictitious tax invoices in the name of the taxpayer but rather issued the tax invoices under duress.
Accordingly, the issue for consideration before the Tax Court was (i) the credibility of Mr A's explanation for engaging in the fraudulent action; and (ii) if it is found that Mr A's explanation was credible, whether the taxpayer would be exonerated from liability. In answering these questions, the Court held that:
■ Given the accounting background of Mr A, it is arguable that he was well acquainted with and understood the provisions of the Act. Therefore, there exists no logical explanation as to why Mr A would have participatedin the fraud gratuitously and in the process expose himself to criminal and punitive assessments, unless heparticipated in the fraud for his own gain.
■ Although Mr A argued that he engaged in the fraudulent activity under circumstances of duress, technically Mr A could have avoided this fraudulent activity by (i) withholding the VAT and duly paying it over to SARS; or (ii) reversing the invoices by issuing credit notes to the third party in term of s21 of the Act.
In light of this, the Tax Court dismissed the appeal of the taxpayer on two grounds. The first was that Mr 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. The second was that irrespective of Mr A's explanation, the taxpayer (and Mr A being the sole member) was patently liable in terms of the provisions of the Act for the VAT as well as the punitive levies.
The decision by the Tax Court in this case is indicative of the fact that in determining the tax liability of a party, SARS will not concern itself with skulduggery among the parties to a transaction. The consequence is that SARS will apply black letter law in determining tax liability without considering the wider facts such as ficticious supplies.