15 Oct 2015

Is the Failure to Pay VAT Equal to Common Law Theft?

Practice Area(s): Corporate & Commercial | Tax |

It is mandatory for all companies to register for Value-Added Tax (“VAT”) if the income earned in any consecutive twelve month period exceeds or is likely to exceed R1 million?.  Companies may also choose to register voluntarily if the income earned in the past twelve month period exceeds R50 000.  VAT is an indirect (not directly deducted from your income) system of taxation, currently levied at 14% on the value of all goods and services supplied by vendors.  VAT is collected and paid to the South African revenue Services (“SARS”) by an intermediary, in the case of the VAT Act a 'vendor'. 

It is often said that the vendor also serves in a sort of fiduciary capacity with regards to the VAT collected, as they can deduct input taxes to determine the amount payable to SARS.  The concept of fiduciary capacity was considered in the case of Director of Public Prosecutions, Western Cape v Parker, 2014.  The Supreme Court of Appeal (“SCA”) asked: “Whether a VAT vendor who has misappropriated an amount of VAT which it had collected on behalf of SARS could be charged with the common law crime of theft?”

In the matter in the court a quo, a close corporation (a registered vendor for purposes of VAT), and its sole representative, Mr Parker, were charged with several counts, including:

  • Common law theft for failing to pay certain amounts of VAT to SARS; and
  • Breaching section 28(1)(a) of the VAT Act No 89 of 1991 by failing to submit certain VAT returns.

As part of it’s case, the State argued that:

  • A vendor acts as an agent for SARS; and
  • A vendor effectively holds VAT in trust for SARS.

In the SCA judgment, the Court stated that:

“[I] do not believe…that section 7(1) of the [VAT Act] either expressly or impliedly creates a relationship of trust. On the contrary, it is clear… that the relationship created by the [VAT Act] is one of a debtor and his creditor…’vendors are entrusted with a number of important duties in relation to VAT’…In other words the vendor is expected to comply with various sections of the [VAT Act] which serve to safeguard the operation thereof and minimise the effects of its weaknesses…the concept of a trust relationship between the vendor and SARS which forms the bedrock of the State’s argument is clearly unsustainable…The [VAT Act] does not confer on the vendor the status of a trustee or an agent of SARS. If it did, the vendor would either have to keep separate books of account or alternatively, would have to be sufficiently liquid at any given time in order to cover the outstanding VAT.”

The SCA therefore held that the VAT Act did not incorporate theft as an offence and for the courts to extend the crime of theft to resolve the State’s difficulties would be contrary to the principle: “without a law, no charge is possible”.  According to this judgment then, a VAT vendor does not 'collect' VAT 'on behalf of' SARS, rather, VAT ,in terms of section 7(1)(a) of the VAT Act, is a tax imposed on the VAT vendor itself, which the VAT vendor is obliged to pay as debtor to SARS.  This definition would not necessarily be applicable, however, in the case of an employer and SARS (in respect of employees tax).  An employer could very likely be regarded as an agent for SARS, holding amounts deducted from the remuneration of employees in trust for SARS.  It would then follow that, if such amounts were misappropriated, a charge of common law theft could perhaps succeed. 

The Tax Administration Act, which from 1 October 2012 provides. for criminal offences relating to non-compliance with tax Act, still does not incorporate theft as an offence.