Is interest in the current VDP regime prescribing?

The Constitutional Court ruled that taxpayers should not be permitted to conclude a VDA and subsequently be allowed to deal with interest separately. Independent to this issue, is the view that the Voluntary Disclosure Programme (VDP) falls outside the ambit of prescription and thus any default has to be declared without taking into account the rules of prescription. The notion is espoused that these two aspects call for an amendment of the current VDP rules. Indeed, the hope is that a review of the VDP will be communicated in the upcoming tax proposals to be announced on 19 February 2025.

The VDP was made permanently available to qualifying taxpayers in 2012 by incorporating the VDP provisions in the Tax Administration Act, 2011 (TAA). The VDP process was intended to be aligned with the South African Revenue Service’s (SARS) strategic objective of providing clarity and encouraging taxpayers to voluntarily regularise and comply with their tax obligations.

The legal question, whether a remission of interest could be considered and decided on by SARS in terms of the Value-Added Tax (VAT) Act once a taxpayer has agreed to pay such interest in terms of a VDA, was extensively considered by several of our Courts and most recently by the Constitutional Court in Commissioner for the South African Revenue Service v Medtronic International Trading S.A.R.L [2024] ZACC 26.

The Supreme Court of Appeal (SCA), reached a conclusion that SARS has a statutory duty to consider a request for remission of interest where a VDP agreement was concluded. The SCA stated that neither the TAA nor the VAT Act expressly provides for the exclusion of the request for the remission of interest where a successful VDP agreement is concluded through performance of the contractual obligation undertaken; and the refusal of SARS to consider an application is a breach of its constitutional duty.  Interestingly, a request for the remission of interest or penalties is not an objection and would arguably not fall foul of s 232 of the TAA. It is only after these requests are denied that the taxpayer may object against the decision not to remit.

The Constitutional Court, on the other hand, upheld SARS’ position and concluded that permitting a taxpayer to separately handle issues related to interest after concluding a VDP, would lead to absurd and destabilising outcomes. It emphasised the necessity for agreements to be enforceable on all terms without the possibility of undoing material terms such as interest payable.

With the highest court having the final say, we consider the impact on taxpayers.  This inevitably brings us back to the intention of the Legislature when it introduced the VDP in the TAA, which was quoted and referred to by the Constitutional Court in its decision:

Memorandum on the Objects of the Tax Administration Bill, 2011, clause 2.2.16.3:

“Voluntary Disclosure Programme (VDP) (clauses 225 to 233):

A permanent legislative framework for voluntary disclosure applicable across all tax types, …, is included in this Chapter. The main purpose of such a framework will be to enhance voluntary compliance and is in the interest of the good management of the tax system and the best use of SARS’ resources…” (our emphasis).

When a taxpayer identifies an issue of non-compliance, particularly concerning VAT, the legislation offers several mechanisms to regularize the position, including remission requests; and requests for reduced assessments for readily apparent undisputed errors.  As an alternative to a VDP, for example, a vendor could correct the default by submitting revised VAT returns where SARS did not identify the instance of non-compliance.  This could be followed by a request for remission of penalties and interest.  Even where SARS identifies non-compliance and raises an assessment, the taxpayer would still be afforded this remedy. These remedies are available to the taxpayer including the rules of prescription, where applicable.  However, these remedies seem to fall away under the VDP.

For these reasons, the program in its current format arguably no longer encourages its use to ‘enhance voluntary compliance’. In fact, vendors could be in a better position opting to not conclude a VDA and rather request remission of penalties and interest following the submission of a self-correction or an assessment by SARS. This also ensures that the vendor falls within the ambit of the rules of prescription, where applicable.

This would seem to go against the policy intent of the VDP which is to promote the “good management of the tax system and the best use of SARS’ resources” as the above remedies are more labour intensive and therefore costly.   

While the courts have considered the relevant provisions of the current legislation and the contractual law principles which could be debated at length, the pertinent issue is whether VDAs should include an interest component at all and whether the VDP should do away with the right to invoke prescription. Excluding interest from the VDA negotiations completely and allowing this and the prescription rules to run their normal course as provided for in the VAT Act and TAA, would result in a more equitable resolution. This would ensure VAT vendors using the VDP process and those using alternative means to regularize their affairs are treated equally.