Archive for the ‘Vat’ Category

What is a VDP?

The VDP is a statutory process where taxpayers, including corporate entities, trusts and individuals, can approach SARS on a voluntary basis with a view to regularise their tax affairs with the prospect of remittance of certain penalties.

Which types of taxes are covered by the VDP?

The VDP is applicable to all taxes administered by SARS (excluding customs and excise).

What are the requirements for the submission of a valid VDP application?

The disclosure must be voluntary.

It must:

  • Involve a default that has not previously been disclosed by the applicant or a representative of the applicant.
  • Be full and complete in all material aspects.
  • Involve the potential imposition of an understatement penalty in respect of the default.
  • Not result in a refund due by SARS.
  • Be made in the prescribed form and manner.

What is the period under review?

The period of review under the VDP is not stipulated in the TAA, although the disclosure must be full and complete in all material respects if it is to be a valid disclosure. Strictly speaking, SARS should go back for as many years as the tax default has occurred.  However in practice SARS will generally not go back further than five years in calculating the tax outstanding in terms of the tax VDP.

What is a default?

A default is the submission of inaccurate or incomplete information to SARS, or the failure to submit information or the adoption of a tax position, where such submission, non-submission, or adoption resulted in:

  • The taxpayer not being assessed for the correct amount of tax.
  • The correct amount of tax not being paid by the taxpayer.
  • An incorrect refund being made by SARS.

A South African tax resident who fails to disclose income tax, interest income, dividends or capital gains tax generated from off-shore assets is an example of a default that may have been committed.

Who is excluded from applying for a VDP?

However, SARS may allow such a person to participate in the VDP when it is of the opinion that the default would not ordinarily have been detected by SARS during the audit/investigation.

A “verification” or “inspection” procedure that was not preceded by the commencement of an audit or by a notice of an impending audit is not regarded as an “audit” for this purpose, and a person will still be able to apply for a VDP in this instance.

Benefits of a VDP

As a result of the disclosure, the Commissioner may not pursue criminal prosecution for any statutory offence under a tax act arising from the “default” or a related common law offence committed by the successful applicant.

The successful applicant will obtain:

  • Relief in respect of understatement penalties to the extent referred to in the understatement penalty percentage table, which provides for a reduction in the percentage of penalties to be levied.
  • 100% relief in respect of an administrative non-compliance penalty that was or may be imposed in terms of the TAA, or a penalty imposed under a tax act, but excluding penalties for the late submission of a return, and penalties for the late payment of tax.

The Supreme Court of Appeal rules that a vendor who fails to pay over VAT to SARS does not commit common law theft

Nothing makes SARS see red as much as a VAT vendor who charges VAT on his goods or services, collects the VAT from his customers, and then fails to pay it over to SARS.

SARS regards this as nothing less than theft. The VAT collected by the vendor did not belong to him, so the argument goes – it belonged to SARS. If the vendor then puts the VAT into his own pocket, he is stealing the money.

SARS’s interpretation of the law was put to the test

The first time that SARS’s view that failure to pay over VAT constitutes common law theft has been tested in the courts in a reported judgment (there was apparently an earlier unreported judgment in AJC Olivier v Die Staat) is during the recent decision of the Supreme Court of Appeal in Director of Public Prosecutions, Western Cape v Parker [2014] ZASCA 223, in which judgment was handed down on 12 December 2014.

In this case, at the instigation of SARS, a VAT vendor (the vendor, accused number one, was a close corporation and the second accused was its individual representative), which had collected VAT but failed to remit it to SARS, was prosecuted in the Bellville regional court and found guilty of, inter alia, common law theft. The individual was sentenced to five years’ imprisonment on that charge.

However, the jubilation in the ranks of SARS following that conviction – with its massive deterrent effect – has now been given a damper, for the conviction on the charge of common law theft has been quashed, first by the Cape High Court, and then by the Supreme Court of Appeal.

Did the failure to remit the VAT to SARS constitute common law theft?

Although the individual in question had appealed only against the jail sentence and had not appealed against his conviction on the theft charge, the Western Cape High Court of its own accord raised the issue as to whether the admitted conduct did in fact amount to common law theft.

Giving judgment in the appeal, the Western Cape High Court answered that question in the negative. Effectively, therefore, the conviction and sentence on the charge of common law theft were expunged.

The prosecution lodged an appeal to the Supreme Court of Appeal, which gave judgment on 12 December 2014, dismissing the appeal and affirming that what had transpired did not amount to common law theft.

Why is a failure to remit VAT to SARS not common law theft?

The superficial attractiveness of SARS’s argument that:

VAT collected by a vendor belongs to SARS, and
failure to remit VAT to SARS constitutes theft,
soon dims when placed under the spotlight.

The Supreme Court of Appeal identified several weaknesses in the argument.

Of major significance is that a VAT vendor is not a trustee vis-à-vis SARS. (If the vendor were, in law, a trustee for SARS, it would have been theft to misappropriate money held in trust.) To the contrary, the court held (at para [9] of the judgment) that the relationship between the VAT vendor and SARS is simply that of debtor and creditor. Thus, if the vendor fails to pay over the VAT, he can be sued by SARS for an unpaid debt.

It is, however, true, as the court pointed out, that, in addition to being sued civilly by SARS for the VAT that was collected but not paid over, the vendor could be criminally charged in terms of section 58 of the Value-Added Tax Act 89 of 1991 for failing to comply with the obligations imposed by the Act – but this is a statutory offence, not common law theft.

Thus, as the court pointed out, when it is sometimes said that a VAT vendor is an involuntary tax collector for SARS, this must not be taken literally – the vendor is not a tax collector for SARS in the formal sense of the word, nor is the vendor an agent of SARS in the strict sense of the word.

The court concluded (at paras [14]–[15]) that –

the concept of a trust relationship between the vendor and SARS which forms the bedrock of the State’s argument is clearly unsustainable . . . . The relationship it creates between SARS and the registered vendor is sui generis – one with its own peculiar nature. The Act does not confer on the vendor the status of a trustee or an agent of SARS.

The implications of the judgment

It is not in dispute that a vendor who fails to remit VAT to SARS commits a statutory criminal offence under s28(1)b) read with s 58 of the Value-Added Tax Act, which is punishable by a sentence of up to two years’ imprisonment.

That potential sentence is thus considerably lighter than for common law theft, and the stigma is less, as the misdemeanour can be downplayed as a technical fiscal offence.

This article first appeared on pwc.co.za.

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VAT REGISTRATION

Posted: August 5, 2014 in Vat

Background

  1. Compulsory registration

Persons that make taxable supplies in the course of an enterprise are required to register as a VAT vendor in certain circumstances. More specifically, VAT registration is required if the total value of taxable supplies made by a business enterprise at the end of a month exceeds R1 million after taking into account the prior 12-month period. Further, VAT registration is required if reasonable grounds exist for believing that the total value of taxable supplies to be made by that person will exceed R1 million in the next 12 months. In both scenarios, the person must apply to register.

Compulsory registration ensures that businesses enter the VAT system in a timely manner.

  1. Voluntary registration

Persons may also voluntarily register as a VAT vendor under certain conditions. In the main, businesses may voluntarily register for VAT if the enterprise has already reached a R50 000 turnover taking into account the prior 12-month period or if the business enterprise is acquired from another party as a going concern after having reached that threshold. Persons intending to carry on an enterprise may also voluntarily register for VAT if the R50 000 threshold will be reached in any 12-month period.

Requests for voluntary registration typically arise in the case of start-ups, small businesses and capital-intensive business with long-lead times. Taxpayers typically seek voluntary registration to obtain legitimacy of business operations vis-à-vis retail or commercial customers or to satisfy other regulatory requirements (e.g. as a pre-entry requirement for obtaining Government business). The need for VAT refunds for legitimate input costs is also a factor if input costs are substantial.

Reasons for change

VAT registration requires contradictory considerations. On the one hand, VAT registration places businesses squarely within the VAT system so as to trigger the 14 per cent charge on outputs. The fiscus needs these persons to be within the net to ensure that VAT is appropriately collected. On the other hand, businesses seek VAT registration for business legitimacy and potential VAT refunds.

These contradictory considerations place SARS in a difficult position. While VAT registration is a critical component of VAT collections, VAT registration poses a risk of unwarranted VAT refunds. In order to balance these risks, SARS must be certain that persons entering the VAT net represent genuine viable businesses. It is not unknown for certain persons to seek VAT registration to reduce the VAT cost for disguised personal consumption or to operate as an entry point for fraudulent VAT refund claims. One unfortunate by-product of these contradictory forces is the increased level of proof required for VAT registration, thereby hindering many legitimate businesses from timely VAT registration.

The change

  1. Overview

In view of the above concerns, VAT registration has been streamlined. Firstly, compulsory registration has been simplified to reduce the predictive element. Secondly, voluntary registration has been streamlined (more specifically subsection (3)(b) and (3)(d)).

  1. Streamlined compulsory registration

In order to reduce the subjectivity around compulsory registration, compulsory registration has been restricted so as to remove the predictive element (i.e. the need to determine the level of business going forward). More specifically, under the revised rules, compulsory registration is required solely for the following two scenarios:

  1. Existing businesses with taxable supplies that have already exceeded the threshold of R1 million within the preceding 12 months (same as current law); and
  2. Existing or future businesses that have a written contractual commitment to make taxable supplies exceeding R1 million within the next period of 12 months.

Examples of circumstances falling within the ambit of the second scenario include commercial leasing contracts or a commitment by Government in a contractual tender to provide goods and services. Removal of compulsory registration based solely on a “reasonable grounds” expectation eliminates most of the dispute involving compulsory registration.

  1. Streamlined voluntary registration

The current provisions for voluntary registration remain as is but with minor tweaks to the legislation. The targeted paragraphs that are tweaked include: paragraph (b) that normally deals with small business and paragraph (d) that deals with specific nature of activities.

The current R50 000 taxable supply threshold test for voluntary VAT registration will be retained. This means that businesses will be subject to the R50 000 threshold test before qualifying for voluntary registration on the invoice basis. However, businesses that are unable to satisfy the R50 000 threshold will be allowed to register for VAT but only on the payments basis without a withholding of refunds. (The payments basis means that VAT is generally accounted for only to the extent that actual payments are received or made).

These businesses will be allowed to remain on the payments basis without having to convert to the invoice basis provided that the value of taxable supplies made by them in a 12 month period does not exceed R50 000.

Effective date

The proposed rules relating to compulsory and voluntary registration will be effective from 1 April 2014.

 

Should you have any queries related to Value Added Tax, please do not hesitate to contact us.

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