Authored by Suzanne Holmes: Director: Indirect Tax (VAT) | Deloitte Africa Tax & Legal, Nadia Du Buisson: Senior Manager: Indirect Tax (VAT) | Deloitte Africa Tax & Legal
We expect the upcoming Budget Speech to focus on increased revenue collection to close the revenue gap announced in the Medium-Term Budget Policy Statement at the end of 2023. The focus on revenue collection will, of course; lead to assessments levied in respect of defaults and errors. Value-added tax (VAT) defaults can either arise from classic capturing errors when completing a VAT return to an incorrect VAT treatment assigned to a supply in the enterprise resource planning system. In instances where a vendor identifies a default prior to a South African Revenue Service’s (SARS) audit or investigation, submitting a revised VAT return may seem a possible method of regularising past errors. However, it is also important to consider other possible remedies so as to determine the most appropriate and efficient resolution to the matter.
Let’s take a scenario where input tax was overstated in a VAT return and compare the processes of submitting a revised return (coupled with a request for remission of the various penalties) as a first option and then the application for Voluntary Disclosure Program (VDP) relief as an alternative.
Compliance with the technical requirements of both processes
Once a revised return has been submitted, the late payment penalty will automatically be levied, together with interest and in addition - an understatement penalty may be levied. The next step is to consider how these penalties can potentially be mitigated.
Late payment penalties
The late payment penalties may only be remitted by SARS under specific conditions. A vendor will have to request remission on the grounds that exceptional circumstances gave rise to the late payment penalties as contemplated in section 218 of the Tax Administration Act, 28 of 2011 (TAA) or because it was the taxpayer’s first incidence of non-compliance as contemplated in section 217(3) of the TAA.
A taxpayer will need to either prove that the default was as result of a “bona fide inadvertent error” or object to the levying of the understatement penalties. There is no avenue to request remission as a first step, like the late payment penalties.
Based on the Guide to Understatement Penalties (Issue 2), SARS only considers typographical errors as qualifying under the “bona fide inadvertent error” exclusion.
A successful application submitted through the VDP, as provided for in Chapter 16 of the TAA, allows for the regularisation of a default without the liability for late payment penalties or understatement penalties.
If the VDP option is followed, it is important to ensure that a VDP application is valid and complies with the requirements of section 227 of the TAA, namely:
It is important in this regard to take note of the Purveyors case, which highlighted that in order for a VDP to be considered “voluntary” SARS should not have any prior knowledge of the default.
Ease of application
A revised return can simply be submitted via eFiling. However, in some instances this is not possible; for example, where SARS has previously performed a verification.
Where the eFiling portal does not accept a revised return, a manual request for a revised return will have to be submitted.
In addition to a revised return, a remission request must be submitted for the 10% late payment penalty; however, this application can only be made once the revised return has been successfully submitted. Should the remission request not be successful, an objection and subsequent appeal may be filed and this could extend the timeline. Should understatement penalties be levied, an objection will have to be filed.
The period may be lengthy due to the various submissions that need to be made and the expected turnaround time of each application, factors that do not necessarily run concurrently.
The VDP process also requires the submission of revised returns, however where a vendor is unable to submit the revised return/s via eFiling, the VDP unit may make the necessary adjustments to the VAT account to reflect the liability due in the correct tax period. The VDP unit may request additional supporting information; however, no additional application has to be made to SARS to adjust the VAT account to reflect the default.
The revised return option may involve the submission of multiple applications to different divisions within SARS while a VDP application is a once-off submission to the unit.
What about interest?
The TAA makes provision for interest to be remitted or reduced in certain exceptional circumstances and SARS’ discretion in this regard is limited to whether the payment of tax was made late as a result of circumstances beyond the vendor’s control. SARS notes, in the VAT404 Guide for Vendors, that circumstances beyond a vendor’s control is limited to the following circumstances:
A natural or human made disaster.
A civil disturbance or disruption in services; and
A serious illness or accident.
As part of a penalty remission request, a vendor can include an application for SARS to consider the remission of interest if arguments to support the assertion that the default was caused by circumstances beyond the vendor’s control can be advanced.
A request for interest remission, as part of the VDP application, is more complex and has in the past been the subject of litigation between SARS and a VAT vendor. The VDP process involves the determination of a tax debt payable in consequence of a default, which includes interest. In addition, the VDP agreement is an agreement to pay mutually agreed tax debt, which again includes the capital and interest payable in relation to the default. In concluding the VDP agreement, the VDP unit includes the applicable interest, and this agreement would need to be acknowledged and signed by the vendor. Can a vendor request remission of interest when applying for VDP relief?
The High Court in Medtronic International Trading SARL v CSARS (33400 – 2019((2020) ordered SARS “to consider, adjudicate and decide on the applicant's request for remission of interest in terms of section 39(7)(a) of the VAT Act, dated 12 October 2018, and inform the applicant of its decision within 15 days of the order being granted.” The remedy to request interest remission would therefore still be available despite any VDP application.
As can be seen from the above, various factors can impact a VAT vendor’s final decision on which remedy to follow when disclosing and correcting a default. The best path to follow may not be as simple as just submitting a revised return. As a result, each case must be considered on its own merits. The correct process will enhance the taxpayer’s experience and encourage vendors to come forward voluntarily, thus increasing tax compliance.