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Materiality in the case of VAT returns

Section 45 of the Value-Added Tax Act makes provision for the payment of interest on delayed VAT refunds. In terms of section 45(1) of the Act, the South African Revenue Service (“SARS”) must, within 21 business days after the date on which the vendor’s return in respect of a tax period is received, refund the vendor. This is provided that the VAT return is complete and not defective in any material respect.

The Tax Court recently considered the concept of “materiality” in such cases in the case of ABC Trading CC v the Commissioner for the South African Revenue Service (VAT case no 1712). SARS was liable to refund the vendor an amount of R71 229 183. ABC instituted legal proceedings against SARS in the Johannesburg High Court, applying for an order compelling SARS to pay the refund relating to the second period as well as interest on the outstanding capital refund amount. The interest component came to R3 570 115. Judgement was granted in favour of ABC.

However, SARS continued with an audit relating to the relevant VAT period and issued a finding that ABC failed to declare deemed output tax on the use of a motor vehicle by its member. The VAT amounted to R200.36 per month, for three months. Based on this deficiency, SARS tried to recall the interest refunded to the taxpayer. ABC objected and appealed SARS’s decision to recall the interest on the basis that the quantum of the output tax relating to fringe benefits (R601,09 in total) was “trifling and clearly immaterial”, and did not constitute “material incompleteness or defectiveness.”

The question before the court was whether ABC’s failure to declare the output tax on the fringe benefit rendered the returns that ABC had provided “incomplete or defective in any material respect” as provided for in section 45(1)(i) of the Act, and whether SARS’s decision to “write back” the interest by affecting an “adjustment” was justified. To put it differently: Were the jurisdictional factors, i.e. that ABC’s returns were “incomplete or defective in any material aspect”, present for SARS to invoke the provisions of section 45(1)(i)?

The court found that section 45 is a pragmatic provision not concerned with principle but with materiality. It 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 consequence of SARS not having to pay interest. However, the Legislature, in its wisdom, determined that expedience trumps principle insofar as the payment of interest by SARS is concerned. The court further noted that in relation to one another, the “defect” and the amount owed by SARS is immaterial and the attempt by SARS to rely on the fringe benefit errors is a transparent attempt for SARS to ex post facto wriggle out of its obligations vis-à-vis ABC.

The important takeaway from the judgement is that SARS is liable for interest on delayed VAT refunds where there are no material deficiencies, and taxpayers should exercise their rights in this regard.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

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