VAT audits: some points to ponder
27 January 2015
Posted by: Author: Alan Lewis
Author: Alan Lewis (ACBS)
deeper look into the practicalities of submitting documentation requested by
I was recently consulted by a taxpayer, who was not
receiving any clear replies from SARS regarding enquires about their claim for
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 , "...in 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
If you cannot find any errors
pertaining to the VAT201 declaration, you are required to submit the following
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 "...as 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
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
"Relevant material required by
SARS under this section must be referred to in the request with reasonable
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”
In a recent judgement, in the matter of SARS v Pretoria East
Motors (Proprietary) Limited (291/12)  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.