By Alan Lewis

This article will consider the provisions of the Tax Administration Act 28 of 2011 (the Act), regarding the levying of penalties, due to a vendor’s failure to either submit a return, or to pay value-added tax (VAT), within the prescribed time period, and whether the South African Revenue Service (Sars) complies with those provisions.

Many vendors have learned – with some shock – that it is not a good idea to either fail to submit their VAT return, or fail to pay VAT, which is due to Sars, within the prescribed time period for doing so. These failures are immediately punished with a penalty, which is equal to 10% of the VAT liability.

In a recent matter, Sars had levied penalties in the vendors account for various tax periods.

The interesting aspect of this matter, is that none of the assessments, which had been issued on the vendor, made any reference to these penalties, nor had the vendor received any other correspondence, which explained the basis for these penalties.

The only reference to these penalties, was found in the vendor’s account, as recorded in Sars accounting system, which was available on e-filing. While this account reflected the various penalties, it failed to offer any explanation for the basis on which Sars had levied them.

However, by examining the various entries for the relevant tax periods, in which the penalties had been levied, it became apparent that Sars had levied penalties, as a result of the vendor’s failure to pay the VAT, which was due in terms of the relevant VAT returns, within the prescribed time period.

The vendor’s explanation was that he accepted that he was entitled to set off those liabilities, against the various tax credits, which were reflected in his tax returns, for other tax periods.

The law

If Sars is satisfied that an amount of tax was not paid, as and when required under the Act, Sars must, in addition to any other ‘penalty’ or interest for which a person may be liable, impose a ‘penalty’ equal to the percentage of the amount of unpaid tax as prescribed in the Act
(s 213 of the Act).

This penalty is imposed by way of a penalty assessment, which assessment must be delivered to the taxpayer and which notice must include the following information:

‘(a) the non-compliance in respect of which the penalty is assessed and its duration;

(b) the amount of the “penalty” imposed;

(c) the date for paying the “penalty”;

(d) the automatic increase of the “penalty”; and

(e) a summary of procedures for requesting remittance of the “penalty”’
(s 214(1) of the Act).

‘(2) A “penalty” is due upon assessment and must be paid –

(a) on or before the date for payment stated in the notice of the “penalty assessment”; or

(b) where the “penalty assessment” is made together with an assessment for tax, on or before the deadline for payment stated in the notice of the assessment for tax’ (s 214(2) of the Act).

Sars is legally obliged to deliver an assessment to a vendor. In this regard, in handing down its decision in the matter of Singh v Commissioner, South African Revenue Service 2003 (4) SA 520 (SCA) at 527 para 17, the Supreme Court of Appeal (SCA) expressed itself as follows:

‘The hypothetical (or assumed) knowledge by the taxpayer of the correct amount of his liability at the date for rendering his return is, no doubt, a convenient fiction for the determination of a date of liability and payment, but the reality is that no taxpayer (bona fide or dishonest) who is kept in ignorance of the fact of an assessment and its content can be expected to reconsider his liability and pay what he owes’ (my italics).

Consequently, the SCA set aside the judgment, which Sars had taken against the appellant, on the basis of an assessment for VAT, which it had failed to deliver to the appellant, prior to taking that judgment.

Conclusion

I submit that the wording of s 213 is peremptory, and places a legal obligation on Sars, to deliver the necessary assessment to a vendor, where it seeks to levy, and recover a penalty as a result of the vendor’s failure, to either submit a VAT return, or pay VAT, within the prescribed time period.

By failing to do so, Sars will fail to create the necessary debt, and consequently, it will have no right to demand payment of the penalty from the vendor. In the light of the definition of a penalty assessment, as set out in s 214(1) of the Act, Sars’ account, concerning a particular vendor, or taxpayer, does not create such an assessment.

Consequently, Sars cannot simply rely on the details of such an account, which may reflect the above-mentioned penalty, to create an obligation on a vendor to pay that penalty.

Sars’ apparent failure to comply with s 214 of the Act, could become a very costly mistake. The Act commenced on 1 October 2012, which is nearly five years ago. It is now high time that Sars take careful note of its provisions, and implement them.

Alan Lewis BProc LLB (UFS) LLM Tax (UP) is and advocate and tax practitioner in Johannesburg.

This article was first published in De Rebus in 2017 (August) DR 17.