The amount that the increase in VAT announced on 21 April 2018 was expected to add to state coffers was R23 billion. However, the accumulated backlog of VAT refunds amounts to R20 billion. So the revenue which the state gained on the roundabout, they have lost on the swings. Not to mention the negative effect on businesses, some of whom have been waiting for up to 3 years for a tax refund – hardly a sustainable business model.
The Illegally withheld VAT repayments amounting to R20 billion have to be refunded by March 2019. The Nugent Commission found SARS arbitrarily delayed tax refunds to inflate collection figures. On 24 August 2018 finance minister Tito Mboweni acknowledged that refunds have caused economic harm, and that a lump sum payment in refunds will be made.
Where does that leave SARS and business owners?
The R20-billion will be taken from an already beleaguered national purse to redress the VAT refund backlog, leaving the national coffers short. In addition to this, SARS often defends these claims in instances where taxpayers are forced to approach the courts, ironically with the taxpayers’ money, which in turn leaves the coffers emptier.
Business pays to get their rightful refund
Taxpayers often turn to tax accountants and tax attorneys to try and claim their VAT refund to which they are legally entitled. This is expensive, especially when an application to the High court or tax court is the only recourse. The fact that taxpayers have to become litigious to recover funds, where these refunds are in fact legally due to them, is a gross maladministration on SARS’ part.
The effects on SMMEs
Small and medium-sized businesses often cannot afford these costs and end up with serious financial hardship and cash flow issues, which in turn forces many businesses to close their doors. SMMEs and even larger enterprises have repeatedly lost out on vast business opportunities, including tenders, as a result. The adverse financial and economic effect of SARS misconduct is much more far reaching and consequential than most people realise.
The Chamber of Commerce
Joan Stott, the Policy Manager at The South African Chamber of Commerce and Industry agrees that, ‘The delay on VAT refunds may have placed additional pressure on businesses in conjunction with rising costs in fuel, electricity, consumer prices and overall goods and services. Those that may have been affected would have had to carry these delays in refunds by adjusting their income and/or expenses. As such they may have had to make decisions around fixed costs such as employees, rental and running expenses.’
What are the rules about VAT refunds
- The payment of a VAT refund is regulated by section 190 of the Tax Administration ACT (TAA).
- According to the Tax Ombudsman, and according to the VAT Act, valid VAT refunds should be paid back within 21 business days.
- If, after 21 business days the VAT refund has not been made, the statutory interest rate will start to run. It should however be noted that this time period is automatically suspended if a taxpayer’s tax affairs are not in order.
- It should be noted that where a taxpayer can provide adequate security, a Taxpayer can request that a refund be made while an audit or verification process is being finalised.
Recourse is expensive
Many taxpayers will be reluctant to follow this course of action, owing to the costs associated with litigation and legal fees. However, in circumstances where the refund is legally due and payable, SARS could very well be ordered to pay the costs of the application. If SARS refuse to make a valid refund, (which is unlawful) the taxpayer can bring an application in terms of the Tax Administration Act (TAA) and the Promotion of Administrative Justice Act (PAJA) to compel the refund, and seek a cost order against SARS, but only if the taxpayer is tax compliant in all other respects.
Who does the taxpayer turn to?
The office of the Tax Ombud is a remedy that a taxpayer can invoke. But the Ombud has proven to be very slow to resolve these issues, or ineffective to resolve them at all. Court proceedings are usually the last resort. This is why tax risk insurance is available, which covers the cost of tax experts, including tax attorneys associated with such a challenge.
Delay in VAT refunds is not new
Yunus Carrim, Parliament’s finance committee chairperson said to Daily Maverick, ‘Following complaints from taxpayers and claims by technical experts, our committee has, for over 2 years now, been raising at every quarterly meeting with SARS whether VAT returns were being delayed, and SARS vigorously denied this.’
If a refund is due, in a particular case, SARS cannot use mere denial as a defence. Their ignorance or unjustified denial should be invalidated by court proceedings as set out above.
How is SARS getting away with this?
The problem is, it’s complicated. And people are unaware of their rights. The majority of taxpayers and even auditors who deal with their client’s refunds, are unaware of the remedies available to them in terms of the TAA, the Constitution and the PAJA.
Is it legal for businesses to withhold monthly VAT payments to SARS if they are owed refunds?
No. Taking the law into one’s own hands is not the best solution, and such cases remain isolated. Withholding a VAT payment is not a legal ground to not pay taxes. If taxpayers and those representing them are aware of their rights when it comes to VAT refunds, SARS could end up being sued for billions by millions of taxpayers.
The administrative actions to withhold a VAT refund, where it is legally due and payable to the taxpayer, is tantamount to theft. At the very least it’s unconstitutional, and in terms of PAJA, its arbitrary, irrational, unlawful and procedurally unfair – all grounds listed in Section 6, that serve as a basis to bring these challenges to court. A class action against SARS is probably imminent, and in instances where a taxpayer does follow court proceedings and SARS fail to comply, the Commissioner could face imprisonment for contempt of court.
The most important advice to consumers is to know the Constitutional Rules regarding VAT refunds and to get professional advice when it comes to claiming what is rightly yours.
About Tax Risk insurance
Taxpayers’ rights are protected by our Constitution. It is complicated though and requires having access to tax experts who can defend you in the event of an audit or investigation. The monthly premiums are low, while defending yourself against a tax audit is prohibitively expensive, and that is why Greatsoft Financial Services offers tax risk insurancewhich provides access to tax experts in Constitutional and Tax Law. If VAT refunds are part of your tax audit dispute with SARS, tax experts will guide you through the process, defend you if necessary, ensuring that your rights are adhered to and it is a fair and just process.
For more information on tax risk cover click here
Authors: Attorney, Schalk WP Pietersespecialising in Administrative law, Tax law and Constitutional law and Prof and Dr Daniel N Erasmus, an international tax attorney who holds a PhD in tax and constitutional law.