A taxpayer in a recent case[1] seemingly managed to get VDP relief without applying for VDP relief and possibly without even satisfying the requirements for VDP relief. If indeed that’s the case, where do taxpayers sign up for what appears to be “special treatment”?

The facts, insofar relevant here and as far as can be established from the judgment, in this case, are:

  • SARS, during an audit of the taxpayer, identified a discrepancy in the taxpayers’ financial statements.
  • SARS sent a notice to the taxpayer requesting an explanation of the discrepancy.
  • The taxpayer responded, conceding it had made an error, the result of which was an understatement by the taxpayer of interest income in the amount of R25 910 000.
  • SARS accordingly imposed an understatement penalty of 25% for reasonable care not taken in completing a return.
  • During closing argument, SARS conceded that the penalty should in fact only have been 15% in terms of column 5 understatement penalty percentage table (“the USP table”).
  • The taxpayer does not appear to have applied for VDP relief.
  • The court, based on SARS’ concession, reduced the penalty from 25% to 15%.

Those familiar with the Tax Administration Act[2] and USP table will know that column 5 of that table applies where a taxpayer has formally applied for relief under the VDP, satisfied the requirements of the VDP, and entered into a written VDP agreement with SARS. [3]

In the case under consideration:

  • It seems that the taxpayer did not apply for VDP relief.
  • It is highly questionable whether the taxpayer would have qualified for VDP relief even if an application was submitted. Firstly, because SARS would probably have identified the understated intertest income during its audit (SARS having clearly identified the discrepancy before the taxpayer informed SARS about the error) which should see the application rejected. Secondly, it is highly unlikely that any application the taxpayer may have submitted for VDP relief after the enquiry from SARS would have been made without any element of compulsion, thereby making the application not voluntary – see Purveyors South Africa Mine Services (Pty) Ltd v C:SARS[4].
  • It seems no written VDP agreement had been concluded between the taxpayer and SARS. If indeed an agreement had been concluded, the taxpayer would not have been able to object (let alone appeal) against the imposition of the understatement penalty (as it did) as assessments raised to give effect to a VDP agreement is not subject to objection and appeal[5]. In any event, if an agreement has been concluded, the penalty would already have been imposed at 15% and not at 25%.

If indeed our understanding of the facts of the case are correct, it seems very strange that a taxpayer who did not even apply for VDP relief and who probably does not even satisfy the requirements for VDP relief gets afforded VDP relief.  It also seems unfair when considering that SARS would typically reject applications for VDP relief where the requirements are not satisfied.  In light hereof, it would be prudent to consider other possible explanations for what seems like SARS treating this taxpayer more favorably than others.

Perhaps it could be argued that column 5 of the USP table is not exclusively available in cases where a formal VDP application has been made, as long as the taxpayer disclosed (in any manner whatsoever) the relevant understatement to SARS after SARS commenced an audit and without SARS having to do the actual digging to find it themselves? That simply can’t be, for several reasons not detailed here but suffice it to state that:

  • According to SARS’ own guide to understatement penalties, column 5 (and 6) of the USP table is available where VDP has been applied for and approved (having said that, it won’t be the first time where the views SARS express in their guides or interpretation notes differ from the views they appear to take in practice – a recent example is SARS’ draft guide on section 93(1)(d) and the views expressed by SARS in IT24674 (25 November 2020) insofar as the applicability of section 93(1)(d) of the TAA is concerned); and
  • Allowing relief in circumstances where a disclosure (in a manner other than a formal VDP application) is simply made following an audit enquiry from SARS may result in the legislation effectively favoring errant taxpayers who come clean after SARS finds them as opposed to those who disclose voluntarily without SARS even knowing about their misbehavior.

Why else then grant VDP relief? Perhaps SARS considered the disclosure made by the taxpayer (which appears to simply have been in the form of a response to the relevant SARS auditor’s question for the taxpayer to explain a discrepancy) during SARS’ audit to be a VDP application? That seems unlikely.

  • One of the requirements for a valid VDP application is that it must be made in the prescribed form and manner. For most taxpayers, that means submitting at least the prescribed VDP01 form and most certainly not responding to an audit query by a SARS auditor working outside the SARS VDP unit. Unless the prescribed form and manner is subjective and there are different prescribed forms and manners for different taxpayers? Surely not.

Perhaps the taxpayer did apply for VDP relief after SARS’ audit notification and after the taxpayer’s having told the SARS auditor about the understated interest income and perhaps SARS rejected that application. SARS would then effectively, by conceding during the appeal to the 15% penalty, have changed their decision (which is arguably permissible in terms of section 9 of the TAA) to rather allow the VDP application (perhaps under mounting pressure or threat of a High Court application). However, for reasons already mentioned hereinabove, it would appear a decision to reject the application would have been more accurate (especially because in these circumstances there would definitely not have been a “disclosure” – see the Purveyors case (supra)) and further still, VDP relief can only follow a concluded VDP agreement and a concession during an appeal does not a written VDP agreement make.

Unless SARS sheds some light on this issue, it is likely we will never know why VDP relief was effectively granted to the taxpayer in this case. This is rather unfortunate because no matter which way we look at it (granted, we do not have all the facts) it does appear as if special treatment may have been afforded to this taxpayer. If indeed that is the case, taxpayers deserve some answers.

[1] IT 45672 (14 December 2021).

[2] 28 of 2011.

[3] Section 229 of the TAA.

[4] (135/2021) [2021] ZASCA 170 (7 December 2021). It is further worth noting that by the time closing arguments would have been made in the case under consideration (November 2021), the SCA had already delivered judgment in the Purveyors case (December 2021). There may even be some argument to the fact that SARS would in any event already have been aware of the error by the taxpayer and that accordingly any subsequent application would not be a “disclosure” within the meaning afforded to that word in the Purveyors case.

[5] Section 232(2) of the TAA (see also the judgment in Medtronic International Trading SARL v Commissioner for the South African Revenue Service (33400/2019) [2021] ZAGPPHC 134 (15 February 2021)