AD CC v CSARS DTC VAT 1069 (25 July 2014)
17 September 2014
Posted by: Author: Pieter Faber
Author: Pieter Faber (SAIT Technical Executive: Tax Law & Policy)
This is an appeal to the Durban Income Tax Court against the
imposition of 200% additional tax in terms of section 60(1)(a) of the Value
Added Tax Act 1991 ("VAT Act”).
The taxpayer is a close corporation operating as a retail
business which is owned and managed by Mr. Y as from 2006. The retail business
was started and managed by Mr Y’s father until he fell ill in 2005, whereupon
Mr. Y returned and took over. The taxpayer was registered for VAT from 1991 to
2000 whereupon SARS deregistered it for not meeting the threshold requirements.
No VAT or income tax returns were submitted by the taxpayer between 2001 and
2010 and no accounting officer was appointed for that period. However, Mr. Y
continued to charge VAT from 2006 – 2010. SARS conducted an audit at a client
of the taxpayer and noted that it was issuing tax invoices and charging VAT on
goods sold. It consequently conducted an audit on the taxpayer during 2010 for
the 2007-2010 years and found that the taxpayer had received deposits of R5,2
million during that period and issued an assessment for R339 614. The taxpayer
had co-operated fully with SARS during the audit and agreed to the capital
amount of the VAT liability raised on assessment, the late payment penalty of
10% and the interest imposed due to its non-compliance. It did, however, object
to the 200% additional tax that was imposed under section 60 of the VAT Act on
the basis that it did not have any intent to evade taxation. Subsequent to the
audit, the taxpayer stopped operations and engaged an accountant to compile the
accounting records of the taxpayer, including the tax liabilities.
Mr. Y on behalf of the taxpayer submitted that when he took
over the business from his father in 2006 he did not understand how the VAT
system operated and merely charged VAT on sales as they had been charged with
VAT on purchases without knowing that VAT had to be paid to SARS. He, however,
did not dispute that no returns had been submitted between 2001 and 2010 and
that no accounting officer had been appointed during that period. Mr Y also
contended that although he accepted the assessed amounts, neither he nor the
taxpayer had any assets to satisfy the amount claimed by SARS.
SARS stated that the taxpayer had been indicated as dormant
since 2000 with no returns being submitted since then. SARS confirmed that it
had the taxpayer’s full cooperation during the audit; however, SARS has, based
on the documents provided by the taxpayer, arrived at different amounts
compared to what the accountant arrived at with various invoices being missing
and various inputs being denied. SARS did, however, concede that the
deregistration of the taxpayer for VAT could have occurred without the taxpayers
knowledge as the deregistration was a result of the taxpayer not meeting the
minimum turnover threshold. The witness of SARS also conceded that he did not
agree with the 200 per cent penalty imposed by the SARS Penalty Committee and
that under the TAA, the taxpayer would have been viewed as a standard case with
a 150 per cent penalty.
The court therefore had to determine the various matters
between the parties which included the in limine
matters raised by the taxpayer, which law applied to the matter subsequent to
the coming into operation of the Tax Administration Act (No. 28 of 2011) (‘TAA’)
and whether the amount of additional tax was properly chargeable.
In limine objections
The taxpayer had raised four in limine objections namely that (1) SARS had breached the secrecy
provisions in the TAA by disclosing who the taxpayer was on which the audit was
performed which led to the taxpayer being selected for audit; (2) SARS had not
complied with the pre-trial discovery requirements by failing to make available
the minutes of the penalty committee meeting; (3) the onus of proof and duty to
begin proceedings was on SARS which it alleged had been agreed with the CASRS
in pre-trial; and lastly (4) the additional tax provisions were
unconstitutional. The court dismissed all four matters on the basis of (1) the
secrecy matter was not relevant to the current proceedings; (2) the minutes of
the penalty committee was also not relevant as the tax court would be hearing
the matter anew; (3) rule 22 of the tax court rules provided for the taxpayer
to begin and reason existed to depart from this, notwithstanding the onus being
on CASRS; and lastly (4) that the taxpayer, as conceded, had not followed the
proper procedure to review on constitutional grounds, including that the tax
court had no jurisdiction on the matter in any event.
Application of the TAA
The 200 per cent additional tax had been imposed in terms of
section 60 of the VAT Act in 2010, which section had been repealed in 2012 with
the coming into operation of the TAA. Furthermore, the appeal had been noted on
11 April 2012 prior to the TAA commencement date of 1 October 2012. The court
stated that the transitional provisions in section 270 of the TAA allowed the
ongoing proceedings to continue under the TAA subject to no prejudice resulting
therefrom. The court concluded without ruling on the matter that the onus for
the additional tax rested on SARS in terms of section 270 read with 129(3) of
the TAA. The court also concluded that the determination of the intention to
evade, as made in the discretion of CSARS, is a question of fact to be decided
by the court as the tax court is not an appeal or review court in the normal
sense but rehears the whole matter as a court of first instance.
The court concluded that Mr. Y was not a credible witness as
to his knowledge and awareness of the taxpayer’s VAT responsibilities and was
therefore unable to accept his contention that he was unaware of the true role
of VAT. The court stated that in examination, Mr. Y, as a person with matric,
was readably able to explain and understand various commercial concepts such as
selling price and cost price and as a previous employee, understood the need
for submitting his IRP 5 to SARS each year. The court was therefore unable to
understand Mr. Y’s confusion as to the application of VAT. The court held that
it cannot rely on Mr. Y’s suggestion of ignorance of VAT as being acceptable.
The court concluded on the facts that SARS had discharged the onus that the
taxpayer knew he had an obligation to discharge and chose not to do so which
meant it sought to evade the payment of VAT.
In imposing a penalty the court was mindful of the relevant
factors such as the punishment of the taxpayer and the deterrent effect on the
taxpayer and other taxpayers. The court concluded that it is mindful that a 150
per cent penalty would have been imposed under the TAA and that that provision
was not applicable in the current instance. The court therefore held that a
penalty of 100%, given the circumstances, was appropriate.
The court noted that the taxpayer had only sought to appeal
the additional tax and was largely successful with such appeal. No cost award
was made and each party must pay its own costs.
Please click here to view full judgement.