Tax refunds are often delayed by SARS leaving the taxpayer in the unfortunate position of not knowing when it will be received. Whether the delay is for a few months, or even years, the financial toll this takes on a business, cannot always be remedied with interest. In some instances this has forced taxpayers to close their doors. Withholding VAT refunds is also to the detriment of the economy.
At Pieterse Sellner Erasmus TRM Tax Attorneys, having attended to countless refund claims, the good news is that SARS must pay out a refund if it is properly refundable under a tax Act and if it is so reflected in an assessment. SARS may, however, withhold a refund for a specific tax period, if that tax period is subject to verification, inspection, audit, or criminal investigation (criminal investigation has recently been added to section 190(2) of the Tax Administration Act 28 of 2011(“TAA”)). This does not mean that if VAT period X is subject to verification, inspection, audit or criminal investigation, SARS may withhold the refund for VAT period Y. It is the refund pertaining to VAT period X that may be withheld.
In Rappa Resources (Pty) Ltd v CSARS (20/18875) (“the Rappa case”) SARS also withheld refunds for periods not yet subject to audit. The audit notices were only issued well after the taxpayer complained. In this regard, the court stated that “…this practice cannot be condoned… SARS cannot continue to withhold refunds where those refunds are not under audit.”
SARS contended in the Rappa case that withholding a VAT refund when an audit is instituted is automatic and is not a decision. The “decision” is only made after the audit. The court found that the decision to withhold refunds is patently different to a decision to audit. Withholding the refund has a direct, external legal effect. The taxpayer’s liquidity is immediately affected.
Without legal intervention, verifications or audits can sometimes take years to finalise. For taxpayers in desperate need of their refund, section 190(3) of the TAA may serve as a light at the end of the tunnel. This section provides that if a refund is subject to verification, inspection, audit or criminal investigation, a taxpayer may tender security. If SARS regards the security as acceptable, the refund must be authorised.
In the Rappa case the court stated that the taxpayer is entitled to a refund of as much as it is able to provide security for.
Unfortunately, the TAA is silent on what SARS would consider as acceptable security. The taxpayer is therefore free to tender any form of security. As an organ of state, SARS is bound by the provisions of the Promotion of Administrative Justice Act 3 of 2000 (“PAJA”) which regulates SARS officials’ conducts. This ultimately means that if SARS does not consider the security tendered as acceptable, reasons as to why not must be provided. These reasons will give the taxpayer an indication of what type of security SARS will consider and accept.
A pending verification, audit, inspection, or criminal investigation is not the only reason why SARS may be withholding a tax refund. Section 102(1A)(a) of the Income Tax Act 58 of 1962 (“ITA”) provides that SARS may refuse to authorise a refund if a person has failed to furnish a return as required in terms of the ITA. Section 44 of the Value Added Tax Act 89 of 1991 (“VAT Act”) contains a similar provision to section 102(1A)(a). Whether or not SARS may withhold a VAT refund due to an outstanding Income Tax Return is debatable. The merits of each case must be properly considered. A taxpayer must in any event always ensure that all outstanding returns have been filed.
If a refund payable by SARS is not paid in full by the effective date, interest accrues and is payable on the amount of the outstanding balance at the prescribed interest rate. Such interest is calculated from the later of the effective date to the date the refunded tax is paid. “Effective date” is defined in the
TAA as “…the date from when interest is otherwise calculated under a tax Act.” An example of an effective date may be found in section 45(1) of the VAT Act where it is stated that interest is payable by SARS within 21 business days after the date on which the vendor’s return is received.
If a taxpayer’s returns are up to date, and a refund is not subject to verification, audit, inspection, or criminal investigation, but the tax refund remains outstanding, SARS must be placed on terms. This may be done by invoking section 11(4) proceedings in terms of the TAA, read with PAJA as a mechanism, or the principle of legality and approaching the High Court for an appropriate order. Should the tax refund be essential for the taxpayer to continue its business operations, the High Court may even be approached on an urgent basis. The grounds for urgency must, however, be carefully scrutinised and the urgency cannot be self-created.
It is advisable to contact a tax professional to assist with the recovery of a tax refund to ensure that there are no unnecessary delays in the process.
CONTACT SCHALK PIETERSE OR DEONE ROOS FOR MORE INFORMATION