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VAT audits: some points to ponder

27 January 2015   (2 Comments)
Posted by: Author: Alan Lewis
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Author: Alan Lewis (ACBS)

A deeper look into the practicalities of submitting documentation requested by SARS. 

I was recently consulted by a taxpayer, who was not receiving any clear replies from SARS regarding enquires about their claim for a refund.

The facts are simple. For the tax period, March 2014, the taxpayer had submitted a VAT declaration (return), in which they had claimed a refund of approximately R 1, 2 million. Not long after submitting this return on SARS’ e-filing system, they received a written notification of verification of value-added tax declaration (VAT 201).  

This notice informed the taxpayer that , " terms of the Tax Administration Act, your VAT201 declaration has been identified for verification as a result of variances detected in this submission.”

This notice proceeded to inform the taxpayer as follows:

"Please review your VAT201 declaration against your relevant Value-Added Tax (VAT) calculations and relevant material. If you find any errors, correct them by submitting a request for correction.

If you cannot find any errors pertaining to the VAT201 declaration, you are required to submit the following relevant material:

The output tax schedule, input tax schedule, all documents relating to capital expenditure claimed (if applicable), and other transactional documents that would for example, substantiate any increase/decrease in sales, inventory, change in use adjustment or bad debts.”

It appears that this notice is issued, apparently automatically, by the e-filing system in the case in which a taxpayer's VAT declaration (return) claims a refund.

In my opinion, there are a number of problems with this notification. In the first place, it may contain unfounded allegations. It commences by stating that the verification is being undertaken " a result of variances detected in this submission.” 

It is most telling, that SARS fails to inform the taxpayer, which entry, or entries, in the return, constitute "variances”, or why that entry, or entries, are considered to be variances, which must be verified.

In the absence of this information, I submit that it would be impossible for any taxpayer to look for any error in the return, as SARS suggests it should do. Most importantly, if this notice is used to verify a VAT refund, then it should simply say so. In that case, and in my opinion, it would be untruthful to tell a taxpayer that the verification is being undertaken as a result of any variances, in that declaration.

Let us return to the taxpayer's story: upon receipt of this notice, the taxpayer submitted the required documents, as they have always done, via e-filing, together with the standard supporting documents, to prove that the goods had indeed been exported. 

Over the next few weeks, they then proceeded to receive five further identical notices. Not one of them explained which additional documents SARS required. In addition, the taxpayer also received a number of telephonic requests for "the documents” from various SARS employees. In reply, the taxpayer invited each caller to make the necessary request in writing. Nothing happened.

In desperation, the taxpayer sought legal advice, and in the light of that advice, they issued a demand for payment of the refund, together with interest, on the delayed refund, failing which it would sue SARS for double payment of these amounts.

SARS did not take long to respond, and requested that the taxpayer submit six specific documents, some of which they had already submitted, in response to SARS' initial notice. The taxpayer submitted these documents, and the refund was paid a few days later.

In terms of section 44 of the Value-Added Tax Act, Act 89 of 1991 ("the VAT Act”), as amended, SARS must make "... a request by registered post, facsimile transmission, electronic means or personal delivery, to the vendor for access to such books and records...” for the purposes of "... satisfying itself as to the amount refundable...”

However, in this case, SARS' request for supporting documents was not based on the provisions of the VAT Act.  Instead, it was based on unspecified provisions of the Tax Administration Act, which is presumably the Tax Administration Act, Act 28 of 2011 ("the TAA”). 

The only relevant section of the TAA, which grants SARS the authority to request documentation, would be section 46, which contains the following enabling provision:  

"(1)SARS may, for the purposes of the administration of a tax Act in relation to a taxpayer, whether identified by name or otherwise objectively identifiable, require the taxpayer or another person to, within a reasonable period, submit relevant material (whether orally or in writing) that SARS requires.” 

So far, so good.  However, subsection 6 of this section, contains the following interesting provision:

"Relevant material required by SARS under this section must be referred to in the request with reasonable specificity”.  

In my opinion, by continually sending the same notification of verification, without identifying, or clearly describing which documents it sought, SARS simply failed to comply with the "reasonable specificity” obligation. 

In a recent judgement, in the matter of SARS v Pretoria East Motors (Proprietary) Limited (291/12) [2014] ZASCA 91, the Supreme Court of Appeal found that SARS is under an obligation throughout the assessment process, leading up to the appeal, and the appeal itself, to indicate clearly what matters, and which documents, are in dispute, so that the taxpayer knows what is needed to present its case.

In my opinion, this reasoning must also apply to the verification of VAT declarations. Consequently, SARS is obliged to tell the taxpayer exactly which documents it requires and for what purpose. The taxpayer is not obliged to guess what SARS requires or why it requires access to its records. In the event of any uncertainly, the taxpayer should request SARS to state clearly what documents it requires and for what purpose.  If it then requires further documentation it should identify those documents clearly.

Where SARS does not receive the requested documents within the required time period, it can disallow the claim for the deduction of the input tax and issue an assessment to recover the resultant unpaid output tax. 

However, if SARS should issue such an assessment where it has failed to reply to a taxpayer's request for clarity on the documentation, SARS may find it very difficult to defend its assessment.

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This article first appeared on the January/February edition on Tax Talk.


Kevin Wright says...
Posted 03 February 2015
Yes I agree,thank you for this article. SARS needs to stipulate what specific supporting documents they require.
Lucinda J. Labuschagne says...
Posted 29 January 2015
Thank you for writing this article.


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