A company involved in the tourism and conservation industry has submitted nil VAT returns as there were no business activity due to the lockdown.
Does SARS have the right to deregister the company for VAT if nil VAT returns are submitted over a period of time?
Deregistration where all enterprises have ceased
Section 24(3) of the VAT Act determines that every vendor who ceases to carry on all enterprises must (shall) notify the Commissioner of that fact within 21 days of the date of such cessation. It further determines that the Commissioner for SARS must (shall) cancel the registration of such vendor with effect from the last day of the tax period during which all such enterprises ceased, or from such other date as may be determined by the Commissioner.
Section 24(4) of the VAT Act determines that the notification envisaged in section 24(3) of the VAT Act must be in writing and must state the date that the vendor ceased to carry on all enterprises and whether or not the vendor intends to carry on any enterprise within the next 12 months.
Circumstances where SARS can deregister a VAT vendor
Section 24(6) of the VAT Act determines that where a VAT vendor has applied for voluntary registration and subsequent to the registration it appears to the Commissioner for SARS that such person’s registration should be cancelled by reason of any of the circumstances refer to in section 23(7) of the VAT Act, The Commissioner may cancel such person’s registration with effect from a date determined by the Commissioner. The proviso to section 24(6) of the VAT Act determines that a person may object to the decision by the Commissioner to cancel its VAT registration and that the registration will remain affective until such time as the Commissioner’s decision becomes final.
Section 23(7) of the VAT Act does not list maintaining minimum registration thresholds as a basis to subsequently deregister a person as a VAT vendor.
Section 24(7) of the VAT Act determines that the Commissioner for SARS must give written notice to the VAT vendor of his decision to cancel the person’s VAT registration.
The nature of a VAT enterprise
“Enterprise” is defined in section 1(1) of the VAT Act as any enterprise or activity which is carried on continuously or regularly in or partly in the Republic [of South Africa] and in the course or furtherance of which goods or services are supplied to any other person for a consideration.
The legal meaning of “continuously” and “regularly”
According to SARS, “continuously” is generally interpreted as on-going, i.e. the duration of the activity has neither ceased in a permanent sense, nor has it been interrupted in a substantial way. The activity does not have to be carried on all the time, but there must be logical progression of the relevant steps needed to bring the activities to conclusion.
The term “regular” refers to an activity which takes place repeated, i.e. when an activity is repeated at reasonably fixed intervals, taking into consideration the type of supply and the time taken to complete the activities associated with making the supply (see Guide for Fixed Property and Construction (VAT 409) paragraph 2.1 and VAT Interpretation Note 70 paragraph 5.1.1).
Inland Revenue, New Zealand, explains the terms as follows (see Tax Information Bulletin Vol.7 No 3):
“An activity is ‘continuous’ if there is no significant cessation or interruption of the activity. In other words, it is carried out all the time. Temporary interruptions in the activity for holiday or health reasons, for example, will not generally mean that the activity is not ‘continuous’. An activity is ‘regular’ if it is repeated at reasonable or fixed intervals.”
Application of the principles
SARS cannot advice a VAT vendor in terms of section 24(6) of the VAT Act that SARS intends deregistering the VAT vendor where the vendor submits nil VAT returns. We base this view of the fact that maintaining above threshold levels of turnover is not covered by section 23(7) of the VAT Act. Kindly note that this only means that SARS cannot deregister a VAT vendor in terms of section 24(6) of the VAT Act. The person must still consider the potential application of sections 24(3) and (4) of the VAT Act.
The critical issue for consideration when considering section 24(3) and (4) of the VAT Act is whether the VAT enterprise carried on by the taxpayer has ceased (i.e. whether the VAT vendor is still carrying on activities regularly or continuously for the purposes of making taxable supplies). Where enterprise activities are temporarily interrupted as a result of Covid-19 consequences, it is unlikely that SARS will regard the enterprise as having ceased provided that the activities to ultimate recommence with the enterprise activities once the Covid-19 impact no longer applies, are still carried on (for example maintenance of the enterprise assets, etc.). As soon as the VAT vendor makes a conscious decision not to re-commence with the enterprise, the VAT enterprise would cease, and the onus is then on the VAT vendor to advise SARS of the change.
In summary: if based on the objective evidence the enterprise has ceased permanently, the onus is on the VAT vendor to advise SARS that all enterprises carried on by the VAT vendor has ceased. Not doing so would constitute an offence and expose the VAT vendor, if found guilty, to a penalty of potential jail time.
Further webinar commentary on Deregistration as a VAT vendor can be accessed here.