[FAQ] A payment arrangement during existing VAT disputes

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[FAQ] A payment arrangement during existing VAT disputes

• 04 May 2021
• Tax Administration
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2021.

Background

A VAT vendor has a substantial amount of VAT outstanding. He wishes to make a payment arrangement with SARS. However, he is still busy with a VAT dispute for two previous VAT periods.

Is there any section in the VAT or any other Act prohibiting the vendor from entering into a payment arrangement with SARS while addressing the dispute?

Answer

The Tax Administration Act(“the TAA”)

A distinction needs to be drawn between applying for a deferral of payment and a compromise with regards to a tax debt due.

Part D of Chapter 10 of the TAA deals with deferral of payment (payments in instalments) and Part D of Chapter 14 of the TAA deals with compromise arrangements.

Deferral arrangements

Section 167(1) of the TAA determines that a senior SARS official may enter into an agreement with a taxpayer in terms of which the taxpayer is allowed to pay a tax debt in one sum or in instalments, within the agreed period. The senior SARS official must be satisfied that the criteria or risks that may be prescribed by the Commissioner by public notice have been duly taken into consideration and that the agreement facilitates the collection of the debt. Section 167(2) of the TAA determines that the agreement may contain such conditions as SARS may deem necessary to secure collection of the debt.

Section 168 of the TAA contains the criteria for an instalment payment agreement. An agreement may only be entered into if:

(a) The taxpayer suffers from a deficiency of assets or liquidity which is reasonably certain to be remedied in the future;

(b) The taxpayer anticipates income or other receipts which can be used to satisfy the tax debt;

(c) Prospects of immediate collection activity are poor or uneconomical but are likely to improve in the future;

(d) Collection activities would be harsh in the particular case and the deferral or instalment agreement is unlikely to prejudice tax collection; or (e) The taxpayer provides the security as may be required by the official.

Compromise arrangements

Section 200 of the TAA determines that a senior SARS official may authorise the compromise of a portion of the tax debt by a debtor which complies with the requirements of section 201 of the TAA. The purpose of the compromise must be to secure the highest net return of the tax debt and must be consistent with considerations of good management of the tax system and administrative efficiency.

Section 201(1) of the TAA determines that a request by a debtor for a tax debt to be compromised must be signed by the debtor and be supported by a detailed statement setting out:

(a) The assets and liabilities of the debtor reflecting their current fair market value;

(b) The amounts received by or accrued to, and expenditure incurred by, the debtor during the 12 months immediately preceding the request;

(c) The assets which have been disposed of in the preceding three years, or such longer period as a senior SARS official deems appropriate, together with their value, the consideration received or accrued, the identity of the person who acquired the assets and the relationship between the debtor and the person who acquired the assets, if any;

(d) The debtor’s future interests in any assets, whether certain or contingent or subject to the exercise of a discretionary power by another person;

(e) The assets over which the debtor, either alone or with other persons, has a direct or indirect power of appointment or disposal, whether as trustee or otherwise;

(f) Details of any connected person in relation to the debtor;

(g) The debtor’s present sources and level of income and the anticipated sources and level of income for the next three years, with an outline of the debtor’s financial plans for the future; and

(h) The debtor’s reasons for seeking a compromise.

The request must be accompanied by the evidence supporting the debtor’s claims for not being able to make payment of the full amount of the tax debt.

Section 202 of the TAA determines that in considering a request for a compromise, a senior SARS official must have regard to the extent that the compromise may result in:

(a) Savings in the costs of collection;

(b) Collection at an earlier date than would otherwise be the case without the compromise;

(c) Collection of a greater amount than would otherwise have been recovered; or

(d) The abandonment by the debtor of some claim or right, which has a monetary value, arising under a tax Act, including existing or future tax benefits, such as carryovers of losses, deductions, credits and rebates.

Section 202(2) of the TAA furthermore determines that in determining the position without the compromise, a senior SARS official must have regard to:

(a) The value of the debtor’s present assets;

(b) Future prospects of the debtor, including arrangements which have been implemented or are proposed which may have the effect of diverting income or assets that may otherwise accrue to or be acquired by the debtor or a connected person in relation to the debtor;

(c) Past transactions of the debtor; and

(d) The position of any connected person in relation to the debtor.

Section 203 of the TAA contains the circumstances under which it would not be appropriate to compromise tax debt. It determines that a senior SARS official may not compromise any amount of a tax debt if:

(a) The debtor was a party to an agreement with SARS to compromise an amount of tax debt within the period of three years immediately before the request for the compromise;

(b) The tax affairs of the debtor (other than the outstanding tax debt) are not up to date;

(c) Another creditor has communicated its intention to initiate or has initiated liquidation or sequestration proceedings;

(d) The compromise will prejudice other creditors (unless the affected creditors consent to the compromise) or if other creditors will be placed in a position of advantage relative to SARS;

(e) It may adversely affect broader taxpayer compliance; or

(f) The debtor is a company or a trust and SARS has not first explored action against or recovery from the personal assets of the persons who may be liable for the debt under Part D of Chapter 11.

Application of the principles

Neither the application for an instalment payment arrangement nor an application for a compromise agreement requires that all disputes be resolved with SARS, although SARS may direct it to be a condition for applying for the relevant relief (which generally speaking SARS would not do). In the case of an ongoing objection and appeal process, the taxpayer may apply to SARS to have payment of tax under dispute suspended pending the outcome of the dispute. This application should not preclude the taxpayer from applying for any other relief measures available in terms of a tax Act or the TAA in relation to any other amount due to SARS.

Conclusion

The ongoing dispute should not preclude the taxpayer from applying for deferred payments or a tax compromise in relation to amounts not related to the dispute/s.

Webinar Commentary

Further webinar commentary on the Tax Administration 101 here.

 

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