The High Cost of Incorrect VAT Returns
31 March 2011
Posted by: Author: Gerhard Badenhorst and Karen Delport
The High Cost of Incorrect VAT Returns
Completion and submission of incorrect VAT returns can result in criminal prosecution
Following a trial during 2008in the Wynberg Regional Court,former South African cricketer, Garth le Roux, and his accountant,Deon van Heerden, were both found guilty of tax fraud and were sentenced to six years’ imprisonment,suspended for two years.
The charges included the alleged failure by le Roux to disclose commission income from property sales at the Fan court Gold Estate in George in one of le Roux's companies, MCC. Van Heerden completed the VAT returns of MCC, and was charged with the alleged omission of the commission income from the VAT returns of MCC. Van Heerden was also charged with making a VAT claim on behalf of another company of le Roux’s, Logoprops, for claiming VAT on membership fees paid to the Links Golf Club as input tax.
MCC conducted an estate agency business and sold properties located at the Fancourt Golf Estate. MCC concluded an agreement with the owner of Fancourt that stipulated that the commission from these sales will become payable to MCC upon registration of transfer of a property in the name of the purchaser.MCC waived its entitlement to receive commissions from the sale of Fancourt properties before registration of transfer took place, and agreed with the Fancourt owner to purchase certain properties at Fancourt for a purchase price reduced by the commission amount owing to MCC.The properties were purchased by companies controlled by le Roux.
The magistrate of the Regional Court found that van Heerden fraudulently misrepresented MCC's income by submitting its VAT returns without disclosing the correct VAT amounts which included the commission income,and that the fraudulently misrepresented to SARS that Logoprops was entitled to claim VAT on the membership fee paid to the Links Golf Club when he knew that the company did not incur it for making taxable supplies.
The State contended that the commissions were subject to VAT in terms of Section 7(1)(a) of the VAT Act, even though no invoices were issued by MCC for these commissions.The magistrate reasoned that MCC's liability for output tax arose at the time of supply of the service, and stated that the fact that MCC did not issue invoices to the Fancourt owner could not assist it as it rendered services on which VAT was payable.
Le Roux and van Heerden appealed against the decision of the magistrate to the High Court of South Africa.The High Court found that there was no evidence to support the findings of the Magistrate's Court. Firstly, the mandate agreement concluded between MCC and the Fancourt owner regarding the payment of commission was subject to a suspensive condition, namely upon registration of transfer of the property sold.Secondly, Section 9of the VAT Act determines the time of supply and which is deemed to take place at the time an invoice is issued by the supplier or the time any payment of consideration is received by the supplier in respect of that supply.
The High Court also referred to VAT Practice Note No. 4 and SARS Ruling No. 87 prescribing when an estate agent must account for VAT collected on his commission, i.e. when the commission is actually paid to the agent or when he issues a separate invoice to the seller for the commission payable, whichever is the earlier.The magistrate was therefore wrong to find that MCC's liability for output tax arose at the time the service was rendered,because MCC did not invoice for the sacrificed commissions—nor did it receive payment of the sacrificed commissions.
The High Court found that there was no evidence to support the finding of the Magistrate's Court that van Heerden had the required intent regarding the non-payment of VAT by MCC when he completed the VAT returns.
The High Court also considered the alternative charge of theft, and stated that a crime of theft is committed by unlawfully and intentionally appropriating someone else's property.A failure to pay a debt—even if it causes the creditor to suffer loss—does not constitute a crime of theft. It therefore found that there was no evidence that van Heerden collected the sacrificed commissions on which the VAT would have been payable, and that a conviction on a charge of theft could not be sustained.
Van Heerden was also acquitted from the alternative charges of having committed offences in terms of Section 58 and 59 of the VAT Act.With regard to the charge of having fraudulently misrepresented to SARS that Logoprops was entitled to claim VAT on the Links Golf Club membership fees, van Heerden was acquitted on the basis the State failed to prove that the fee paid for Links membership was disqualified from input tax credit by Section 17(2)(b) of the VAT Act,and that the VAT return in which the input tax was claimed was not completed by van Heerden.
Although both le Roux and van Heerden were both fully vindicated,they were, no doubt, severely traumatised by the trials and the sentences imposed by the Magistrate's Court.However, this case shows how important it is that any person who is involved with the completion and submission of VAT returns—even if it is on behalf of another entity or person—should exercise extreme care to ensure that the VAT return submitted is accurate and complete in every sense.
Source: By Gerhard Badenhorst and Karen Delport (Tax breaks)