[Article] Owing VAT is not theft

[Empowerlaw]

Owing VAT explains: A company (as well as its directors/shareholders) or a Close Corporation (and its members) that receives VAT but does not pay over VAT to SARS, cannot be prosecuted for theft. SARS has tried this route often in the past and each time the Courts have found that not paying over VAT that was collected, is not theft.
Court case

One of the latest court cases where this was decided is in the matter of Grayston Technology Investments (Pty) Ltd and Another v S [2016] 4 All SA 908 (GJ).
Facts

The events leading up to this case were the following: Grayston Techonology Investments (Pty) Ltd (“Grayston”) was a company that swiftly did business. The business collected VAT but never paid over VAT to SARS for a period of eight years. The company also did not pay over the PAYE of the staff, although it had deducted the monies from the employees’ salaries. The company also did not submit its tax returns. As often happens, the company used the VAT and the PAYE it deducted for running business expenses.
Issues

The relevant issues here are (a) the collection of VAT and not paying it over; (b) not handing in tax returns and (b) deducting PAYE from the staff but not paying it over.

The company was voluntary liquidated in 2011. SARS took the matter to the regional court and the only shareholder of Grayston as well as Grayston was charged in the regional court with failure to submit tax returns and of theft of the VAT monies that were collected, but not paid over to SARS. Both the shareholder and the company was convicted of both charges in the Regional court, but then appealed.
Appeal court

The appeal court was asked, inter alia, to make a determination on whether failure to pay over VAT to SARS constitutes theft. The court held that collecting VAT but not paying it over to SARS does not constitute theft, because the relationship between SARS and a VAT vendor is nothing other than that of a debtor and creditor. This means it falls under civil law and not criminal law and therefore, not paying over VAT cannot be a crime. The court said that if a VAT vendor receives VAT in its bank account, it does not mean that the money is received on behalf of SARS by the VAT vendor as SARS’ “agent”. Nowhere in the VAT Act (Value Added Tax Act 89 of 1991), the law of agency or any trust relationship is there an obligation of a VAT vendor to act on behalf of SARS.
Relationship with SARS

Owing VAT is not theft because, the court said, a VAT vendor is not a collecting agent of SARS. Since the relationship between SARS and a VAT vendor is only that of debtor and creditor, SARS only has a personal claim against the VAT vendor. This means that, instead of taking criminal action (theft charges), SARS can only issue summons like any creditor would and follow the collection procedure.
Is there fraud when owing VAT

Owing VAT is not theft because, further, the court said, that it can only be theft if there is an element of fraud involved and the VAT vendor takes something for himself that does not belong to him. As the output VAT does not belong to SARS at any time before it is appropriated, the failure to pay over the VAT to SARS cannot be theft.
PAYE

When it comes to PAYE, a different relationship exists between SARS and the employer. The employee also remains liable for the PAYE if the employer does not pay the PAYE over to SARS (even if the employer deducted it from the employees’ income and did not pay it over to SARS. It is not discussed here as the topic of this article is VAT.

Owing VAT is therefore not theft and the directors/shareholders of a company/close corporation can rest assured that they cannot be charged with a crime if they did no pay over VAT.

http://www.empowerlaw.co.za/owing-vat-not-theft/

nanika@nanikalaw.co.za
Direct contact no: 072 855 8106 (Nanika Prinsloo)

[Dave A]

When it comes to PAYE, a different relationship exists between SARS and the employer. The employee also remains liable for the PAYE if the employer does not pay the PAYE over to SARS (even if the employer deducted it from the employees’ income and did not pay it over to SARS. It is not discussed here as the topic of this article is VAT.

I'd be pretty interested in reading the basis of this conclusion nonetheless - particularly why the employee would remain liable for the non-payment by the employer.

[SilverNodashi]

That's quite an interesting twist on the "VAT was never yours to begin with, it belongs to SARS" argument

[vieome]

I'd be pretty interested in reading the basis of this conclusion nonetheless - particularly why the employee would remain liable for the non-payment by the employer.

http://www.saflii.org/za/cases/ZAGPJHC/2016/249.html full story here!

[Dave A]

Thanks Vieome.

Having read the full judgement, I'm inclined to believe that the following statement is patently untrue -

When it comes to PAYE, a different relationship exists between SARS and the employer. The employee also remains liable for the PAYE if the employer does not pay the PAYE over to SARS (even if the employer deducted it from the employees’ income and did not pay it over to SARS.

I refer to footnotes 69 & 70 which state thus -

[69] Para 4;

Any amount required to be deducted or withheld in terms of paragraph 2 shall be a debt due to the
State and the employer concerned shall save as otherwise provided be absolutely liable for the due
payment thereof to the Commissioner.

[70] It would appear that there are only a few situations where the Schedule does not impose absolute liability on the employer to the exclusion of the employee, even if no IRP5 certificate is obtained. They are to be found in Paras 5(2), 28(1) (b), 28(3) and (4).

Para 5(2) which provides for joint liability is only triggered where the employer has not deducted or withheld the amount of employees’ tax, the effect of which is that the employee received his income in full without a PAYE deduction.

Para 28(1) (b) contemplates the case where the employee will be responsible for income derived from a source other than remuneration arising from employment or some circumstance personal to the employee taxpayer discovered during a tax audit or assessment but where the employer nonetheless is likely to have correctly applied the PAYE tables.

Paras 28 (3) and (4) deals with the corollary to Para 5 and are concerned with where a return was rendered claiming that PAYE had been deducted whereas it was not. The ordinary inference is that there was collusion which accounts for joint and several liability being imposed unless the employer can demonstrate that the underpayment was due to a bona fide error.

The present case falls squarely within Para 4. It is therefore unnecessary to distinguish Estate Late GA Pitje v Commissioner for South African Revenue Service (2002) 66 SATC219 (WLD) which concerned the application of Para 5 since in that case the employer had failed to deduct PAYE from the employee’s pay cheque.

I stress - "It would appear that there are only a few situations where the Schedule does not impose absolute liability on the employer to the exclusion of the employee, even if no IRP5 certificate is obtained."

In all instances provided for, the employer would not have actually deducted the PAYE due from the employees' income.