When does a VDP application become involuntary?

Purveyors South Africa Mine Services (Pty) Ltd v CSARS:  Import VAT- does mere knowledge of a default by SARS render a subsequent voluntary disclosure programme application under section 227(a) of the Tax Administration Act involuntary? Legislative compliance and timing are vital.

Written by André Henry Daniels, Admitted Attorney at Tax Consulting South Africa, for LexisNexis South Africa.

[Durban, 13 November 2020]

Purveyors South Africa Mine Services (Pty) Ltd v CSARS (61689-2019) [2020] ZAGPPHC 409 (25 August 2020)

Issue
Whether the voluntary disclosure programme (“VDP”) application submitted on behalf of the Applicant (Purveyors South Africa Mine Services (Pty) Ltd) to the Respondent (Commissioner of the South African Revenue Service) on 04 April 2018, constitutes a "voluntary" disclosure as contemplated in the provisions of section 227(a) of the Tax Administration Act, 28 of 2011 (“the Act”).

Facts
Purveyors South Africa Mine Services (Pty) Ltd (“the taxpayer”) had imported an aircraft (“the aircraft”) into South Africa during 2015 which it then used to transport goods and personnel to other countries in Africa.

The taxpayer became liable for the payment of Import VAT to the South African Revenue Service (“SARS”) in respect of the importation of the aircraft in 2015, which it failed to do.

During the latter part of 2016, the taxpayer manifested reservations about its failure to have paid import VAT and accordingly engaged with certain representatives of the SARS to obtain a view on its liability for such tax. In doing so, it conveyed to SARS's representatives a broad overview of the facts, but no more.

Following the above engagements, the taxpayer was advised by SARS on 1 February 2017 that the aircraft should have been declared in South Africa and Value-Added Tax (“VAT”) paid thereon, but more importantly, it was advised that penalties were applicable as a result of the failure to have paid the VAT.

The taxpayer, approximately a year later, subsequently applied to SARS for voluntary disclosure relief in terms of section 226 of the Act.

SARS subsequently declined to grant relief on the basis that the taxpayer had not met the requirements of section 227 of the Act.

The taxpayer’s case
It was the taxpayer’s contention that the crux of its case was that as at the date of submission of its VDP application, it had not been given notice by SARS of the commencement of an audit or criminal investigation into its affairs, which had not been concluded as contemplated by the provisions of section 226(2) of the Act, and that the effect thereof was that this application was indeed “voluntary” as contemplated in section 227(a) of the Act, despite the said prior knowledge of the taxpayer’s default on the part of SARS.

The taxpayer then proceeded to argue that the provisions of Part B of Chapter 16 of the Act (sections 225 to 233 dealing with the "voluntary disclosure programme") do not require in any manner or form, either expressly or by implication, that a VDP application is to be considered through the lens of section 227 of the Act on the basis that it is compulsory for such application to disclose information or facts which SARS was unaware of.  In terms of the statute, such a requirement simply does not exist. Having regard to the relevant statutory provisions, including section 227 of the Act, prior knowledge on the part of the SARS is not a disqualifying factor for a VDP application to be considered “voluntary”.

SARS’ case
SARS contended that s227 of the Act envisages a disclosure of information or facts of which SARS had been unaware of.

SARS further submitted that the chronology of events demonstrates that the relevant application did not constitute a “disclosure”, nor was it made voluntarily:

• On 30 January 2017, the taxpayer requested an appointment with SARS to discuss its liability to pay VAT in respect of the aircraft. In the e-mail, the taxpayer explained to SARS the broad nature of the default it had committed;
• On 1 February 2017, SARS responded and indicated that the aircraft was subject to penalty implications. SARS also requested to see documentation in terms of Section 101 of the Customs and Excise Act 91 of 1964;
• On 2 February 2017, the taxpayer acknowledged receipt of the above correspondence and indicated that it would revert as soon as possible with the requested information;
• On the 29 March 2017, SARS wrote to the taxpayer in which it explained the reasons why VAT and penalties were payable. SARS further indicated that the taxpayer needed to appoint a clearing agent to assist it with an Import Permit in order to regularise its continued default;
• The taxpayer responded on the same day, being 29 March 2017, and indicated that its understanding from SARS’s correspondence was that VAT output and custom duties, as well as fines and penalties, were applicable;
• SARS responded with correspondence dated 30 March 2017, in which it sought to clear the misunderstanding. SARS indicated that there existed no waiver of potential penalties and further that if the tax to the Receiver is late, the taxpayer will be liable for penalties and interest;
• On the 16 May 2017, SARS addressed further correspondence to the taxpayer indicating that it had to regularise its affairs, as the taxpayer had already been afforded sufficient time to do so. The taxpayer responded and indicated that it was still awaiting a response from its Head Office; and
• Subsequent thereto, the taxpayer took no further steps until 4 April 2018, when it applied for relief under the VDP. This was approximately a year after the last correspondence was addressed to SARS.

Outcome
The Court ruled in favour of SARS and dismissed the taxpayer’s application with costs, including the costs of two counsel.

Core reasoning
The Court considered Section 227 of the Act which provides the requirements for a valid voluntary disclosure as follows:

"Requirements for valid voluntary disclosure.—

The requirements for a valid voluntary disclosure are that the disclosure must-

1. be voluntary;
2. involve a 'default' which has not occurred within five years of the disclosure of similar 'default' by the applicant or a person referred to in section 226(3);
3. be full and complete in all material respects;
4. involve a behaviour referred to in column 2 of the understatement penalty percentage table in section 223;
5. not result in a refund due by SARS; and
6. be made in the prescribed form and manner."

The concepts of “default”, “voluntary” and “disclosure” make up the three essential components of section 227 of the Act for purposes of considering the present case.

Section 225 defines “default” to mean the submission of inaccurate or incomplete information to SARS. In the present instance, the concept of “default” is not contentious as it is common cause that the taxpayer had failed to pay import VAT in 2015 when it should have done so. Hence its application for the voluntary disclosure relief. The inquiry herein must therefore be concentrated on the concepts of “voluntary” and “disclosure”.

It is contended that, on consideration of the facts pleaded by both parties in the present application, it cannot be held at a factual or legal level that the taxpayer's VDP application was not made "voluntarily" as contemplated in section 227(a) of the Act.

The high-water mark of the VDP statutory provisions contained in the Act (insofar as disqualification of certain VDP applications is concerned) is stated in section 226(2) of the Act - namely where a person seeking relief has been given notice of the commencement of an audit or criminal investigation, such may be regarded as not voluntary. In this regard the statute is silent on the issue of any prior knowledge by SARS of the relevant default.

In the present instance, it is common cause that no notice to commence any audit or investigation had been given. It follows that the taxpayer’s VDP application thus had to satisfy the requirements of section 227 of the Act in all respects and in particular section 227(a) of the Act. The taxpayer’s emphasis on the fact that no notice had been given in terms of section 226(2) of the Act, misses the point. That is because Section 226(2) deals with disclosures by taxpayers who are already subject to an audit or criminal investigation. A taxpayer not subject to an audit or criminal investigation cannot make a disclosure under section 226(2) as that taxpayer would not have met the jurisdictional requirements of 226(2) i.e. being subject to an audit or investigation.

Section 226(1) of the Act allows any person to bring a VDP application and the taxpayer’s application is an application in terms of this section. SARS’ case was not premised on section 226(2) of the Act, but rather on section 227. It is the latter section that is applicable to the taxpayer’s VDP application.

A VDP application must comply with the requirements of section 227 whether made terms of sections 226(1) or 226(2) (for those subject to an audit or investigation and a senior SARS official considers it appropriate).

The taxpayer contended that if notice of an audit has been given, a subsequent VDP application cannot be voluntary. Conversely, if no notice of an audit has been given, then the only possible result is that it was voluntary. This argument is premised on an interpretation of section 227 of the Act which is inconsistent with its context and purpose. Section 227 is broad in its ambit and is not subject to section 226(2). The Court held that the legislature deliberately did not confine involuntary applications to the giving of an audit notice in terms of section 226(2) of the Act. The reason is obvious. There may be other circumstances under which an application is made which would not be classified as voluntary. The present is such an instance. Had the legislature intended to confine an involuntary application to one circumstance, namely the receipt of a notice, it could have easily done so.

Moreover, the purpose of the VDP is to incentivise errant taxpayers to come forward and voluntarily regularise their tax affairs. That purpose would be defeated if the only circumstance under which a VDP application were to be held as involuntary was the receipt of a notice of an audit in terms of section 226(2) of the Act.

The interpretation favoured by the taxpayer was held to be too narrow and did not accord with the purpose of section 226 of the Act and what it seeks to achieve. In this instance, the only relevance that section 226 of the Act (as a whole) has with section 227 is through section 226(1) in terms of which the VDP application was brought. The determination of whether it is valid or not is made in terms of section 227 without reference to section 226(2).

The further question was whether the VDP application was “voluntary”. The term is not defined but its ordinary meaning is “an act in accordance with the exercise of free will”. If there is an element of compulsion underpinning a particular act, it is no longer done voluntary. In the context of Part B of Chapter 16 of the Act, a disclosure is not made voluntarily where an application has been made after the taxpayer had been warned that it would be liable for penalties and interest owing from its mentioned default, as occurred in the this instance. It was submitted by SARS that the application was brought in fear of being penalised and with a view to avert the consequences referred to.

Lastly, SARS contended that there had been no disclosure of information of which SARS had been unaware. When taxpayer made the VDP application, it was obviously aware that SARS knew of its default. The taxpayer in fact disclosed nothing new, and therefore the Court held that the VDP application was therefore not a valid one.

Sections 226 and 227 of the Act do not provide for interpretation in terms whereof an application for VDP relief can notably be regarded as being made involuntarily if the Respondent had prior knowledge of the relevant "default". In this respect the ambit of SARS’ contention is too wide, particularly if regard is had to the provisions of section 226(2) of the Act. Section 226(2) does not consider mere knowledge by SARS concerning a particular "default" as a disqualification in respect of a VDP.

The Court held that:

• The interpretation put forward by the taxpayer is too narrow and does not accord with the purpose of the said sections or what they seek to achieve;
• The VDP application was not “voluntary” for the reasons referred to; and
• There was no disclosure to SARS of information of which it was not already aware.

Take-away
When making a VDP application, it is critical to comply with the legislative requirements. As can be seen from the present case, the timing of a VDP application is of utmost importance. Engaging with SARS in respect of a potential tax liability, may not be the best approach, as there can be no disclosure if SARS already has knowledge thereof, and certainly not in the present statutory context. However, mere knowledge by SARS is not enough to render VDP involuntary. The best approach for the taxpayer in this instance, would most probably have been to submit an anonymous VDP application, stating that the taxpayer intends to disclose the default under a VDP application for the relief of any penalties imposed.

In the alternative, the taxpayer should have requested clarification as to the correct procedure to follow, necessary to regularise the taxpayer’s historic tax affairs and the possible penalty relief available to the taxpayer, in terms of section 228 of the Act, read together with section 88 of the Act, and the definition of “non-binding private ruling” provided in section 75, apply to SARS for the issuance of a non-binding private opinion.

It is critical to use specialists when making a VDP application in order to avoid a situation as suffered by the taxpayer in this case.