Owing VAT to SARS is not a crime

Owing VAT to SARS is many a business owner’s nightmare.  SARS threatens with criminal action and tells you it is theft.  What do you do? Can SARS really lock you up for not paying VAT? There is good news: SARS can’t! This was confirmed by the Supreme Court of Appeal on at least two occasions.  Read our article on the court case of Grayston Technologies v SARS elsewhere on our site (under articles) where the court confirmed that not paying VAT to SARS is not a criminal act. The Court of Appeal also confirmed this in the criminal matter of The Director of Public Prosecutions v Parker (103/14) (2014) ZASCA 223. This article deals with the Parker case.

What happened?

Business A was a VAT Vendor (Close Corporation) which did not pay certain amounts of VAT to SARS.  Parker was the sole member of the Close Corporation and for that reason was charged by SARS for failing to submit some VAT returns (in terms of section 28(1)(a) of the VAT Act and for common law theft by failing to pay some monies owing for VAT to SARS. Parker and the CC pleaded guilty, was convicted and sentenced to five years’ imprisonment in respect of the theft conviction.

The judge with common sense

The High Court judge queried whether Parker should have been charged with common law theft in the first instance and Parker also decided to appeal his conviction. The court found on appeal that not paying VAT over to SARS is not common law theft, because when the money is paid into the account of the CC, the money belongs to the CC and not to SARS, therefore it cannot be theft.  Owing VAT to SARS does not mean that it is SARS’ money that was received in the VAT vendor’s account.  There is therefore no legal ground that exists for SARS that a portion of the money in your business account is SARS’ VAT money, which means you cannot be charged criminally for not paying over VAT. Isn’t that great news?  If you also read my article on the Grayston case, you will note that the courts have made it crystal clear that owing SARS VAT money is not a criminal case but a civil one.  The difference between a criminal case means that for a criminal case you can be sentenced to jail time if found guilty, but in a civil case SARS is a creditor like any other and must take legal action by issuing summons against the debtor.

Debtor and Creditor

The Court said that the relationship between SARS and the VAT vendor for VAT is that of debtor and creditor.

The business is the debtor, not the directors/members. SARS can only collect VAT monies by taking civil action (issuing a summons and attaching assets).

To collect VAT, SARS must issue summons against the company/Close Corporation first and cannot act against the directors/members unless the directors/members have bound themselves in writing and in their personal capacities to SARS to pay the debt, or have traded recklessly and SARS can successfully get a judgment in their favour for that (very difficult to prove reckless trading unless there was obvious bad trading, but trading in the normal course of business is not necessarily reckless trading).   SARS can only act against the company/CC first and thereafter only, if the company/CC does not pay the VAT, act against the directors/members personally IF SARS can prove that the directors/members traded  and IF the Company/CC has not been liquidated before they can do that. If the Company/CC is liquidated, the VAT is written off and cannot be collected from the directors/members personally if they were not sued before the Company/CC liquidated.

So, is owing VAT to SARS a crime or not?

SARS argued that a vendor is an agent of SARS and effectively holds VAT in trust for SARS and if the vendor uses the VAT for other purposes than for VAT, then it is theft.  The court said that that cannot be, because of the debtor/creditor relationship between SARS and the VAT vendor.  The relationship between SARS and the  VAT vendor is a relationship of its own nature and is created in the VAT Act (sui generis – just to give your relationship with SARS a Latin name…).

Owing VAT to SARS does not mean that the vendor is a trustee or agent of SARS.  If this was the case, the VAT vendor would have had to keep separate books for the VAT or would have to have enough money in its bank account to cover for VAT at all times.  The VAT Act does not make provision for this, the court said.  The court said to SARS that it should rather amend the VAT act if it is unhappy with the penalties contained in the Act, but unfortunately for SARS not paying VAT over to SARS is not a criminal act. Which of course is great news for VAT vendors.

Owing VAT to SARS is not a crime

The bottom line of the matter is this:  A VAT vendor does not collect VAT on behalf of SARS from the person who pays for the goods or services delivered.  VAT, in terms of the VAT Act (Section (7)(1)(a) is simply a tax imposed on the VAT vendor itself (not on the recipient of the goods/services that the vendor delivered the invoice to) and the VAT vendor is obliged to pay to SARS and because of this, the VAT vendor is a debtor of SARS and SARS is the creditor.

(PAYE is another matter as that refers to the relationship between SARS and an employer for employees’  tax. In this case the employer may be regarded as an agent for SARS, because amounts are usually deducted from employees for the purpose of paying the monies over to SARS as a tax.  Common law theft could succeed, but I personally have not heard of one criminal case against a person for failing to pay over PAYE. Don’t say it can’t happen, I am just saying I haven’t heard of anybody being charged for it.

In any case, if you liquidate, the PAYE is also written off and it will remain due by the employee.