It is in your interest

Historically SARS denied a taxpayer interest on delayed VAT refunds if the refund returns contained errors resulting in the amount of tax payable changing.

This policy was applied irrespective of the amount of the adjustment. A judgement delivered recently overturned the apple cart and introduced the principal of materiality into tax. 

Introduction 

The VAT Act determines that SARS must pay interest to VAT vendors on refunds not made within 21 business days from the date that the VAT returns were submitted. Unfortunately the VAT Act contains a get-out-of-jail-free card in favour of SARS. SARS often uses this card to avoid paying interest to taxpayers on delayed refunds. 

The get-out-of-jail-free card comes in the form of a requirement that no interest is payable if the VAT return in which the refund is claimed is “incomplete or defective in any material respects.”

SARS applies the policy that “incomplete or defective in any material respects” includes any occurrence where the amount of VAT payable changes, irrespective of how insignificant the amount may be.

This approach has now been successfully challenged in the Tax Court bringing the concept of materiality into tax administration.

The facts

The crisp facts of the case are that SARS delayed a refund in excess of R72 million and then sought to escape paying interest due to the VAT vendor, of R3.6 million, by making an adjustment of R600 to the original VAT return. 

The VAT vendor did us all a favour and challenged this approach in court.

What  did SARS have to say …

SARS argued that any error is material to SARS and non-compliance with the relevant provisions of a tax Act could simply not be condoned. It argued that the Commissioner is tasked with collecting all the taxes due to the fiscus irrespective of how immaterial “they may seem to be”.

What was the taxpayer’s response …

The taxpayer contended that the quantum of the output tax adjustment was “trifling and clearly immaterial” and did not constitute material incompleteness or defectiveness as envisaged in the VAT Act.

So the battle lines were drawn …

The court had the last say …

The tax court held that the requirement dealing with “incomplete or defective in any material respects” is a pragmatic provision not concerned with principle, but with materiality. 

The court held:

 “It [the Law] recognises the fact that vendors may render returns that are incomplete or defective. If it were a matter of principle then any defective or incomplete return would carry the consequences of SARS not having to pay interest. But, the Legislator, in its wisdom, determined that expedience trumps principle insofar as the payment of interest by SARS is concerned.” 

If the above is not music to your ears, the court also held:

In the premises the attempt to rely on the fringe benefit errors is a transparent attempt for SARS to get out of its obligations.

In short, SARS pay the taxpayer the interest due to it!

Conclusion

VAT vendors should resist attempts by SARS to refuse to pay interest if VAT returns only contain marginal or insignificant errors. 

The not-so-good news is that this has only been the first salvo. SARS is likely to appeal the judgement. Let’s see where this is goes.