The Managing Director of VAT IT SA takes us through VAT fraud in South Africa and the impact on the South African Revenue Service (SARS), including legislative amendments and how SARS is combatting VAT fraud.
Value-Added Tax (VAT) fraud remains a major concern for SARS. Fraud does not only impact the national fiscus but also the livelihood of all South Africans. SARS has imposed certain legislative and administrative rules to prevent fraud (such as the rules relating to substantiating documents) and have intermittently sought to control VAT fraud through limiting VAT registrations, blocking or delaying refunds and more frequent verification and audit engagements. This article explores the current concerns around VAT refund and whether the current methods are hitting the mark.
What is VAT fraud?
VAT fraud is a type of tax evasion whereby a taxpayer intentionally and willfully obtains undue refunds from SARS or reduces its liability outside the parameters prescribed within legislation.
Tax fraud is a serious crime and manifests in many forms. Here are some key examples:
· Vendors who collect VAT from their clients but don’t declare the income on their returns.
· Declaring fictitious expenses or zero-rated sales on their returns to reduce the tax they pay or to obtain an undue refund.
· Charging and collecting VAT from clients without being registered.
· Not responding truthfully to verifications and audits conducted by SARS and thereby obtaining an undue VAT benefit.
· Creating, amending or falsifying documents (both sales and expenses) in an attempt to pay less tax or obtain undue (fraudulent) refunds.
· Not registering for VAT when compelled in terms of the law to evade paying their dues.
Fraudsters are constantly developing new schemes to steal money from the fiscus. National Treasury together with SARS must monitor and remedy these situations by either introducing supplementary legislation or administrative policies.
How does VAT fraud occur?
Even though the majority of taxpayers are honest and file compliant VAT returns, fraud is widespread and common. Combatting fraud is a real challenge.
VAT fraud sometimes occurs in the simplest ways. For example, a vendor requesting a cash payment from a client and not declaring the sale in a return. However, VAT fraud can also occur on a larger scale where fake companies are registered for VAT, and fraudulent refunds are claimed. Unfortunately, there were instances recorded where this occurred with the assistance of corrupt SARS officials, which makes it a greater challenge for SARS to combat.
There are also instances where tax practitioners are involved in tax fraud without the knowledge of their clients. For example, a client’s bank details are changed by the tax practitioner to channel undue refunds for their own benefit.
What is SARS doing to combat VAT fraud?
Due to the common occurrence of VAT fraud, SARS is sometimes obliged to take drastic measures to combat this crime. These measures may take the form of administrative policies or legislative amendments.
Administrative policies include the ease of reporting fraudulent transactions through the SARS website whereby anyone can report suspicious activities. The online form is easy to complete and requires basic information to be submitted to report criminal activity. Report a tax crime | South African Revenue Service (sars.gov.za)
Other channels are also available to report a suspicious activity in a state department or state-owned entity, where the person reporting the crime does not want to engage the state-owned entity directly.
For example: a SARS official is suspected of being involved in a criminal activity and the person wishing to report the crime does not want to engage with SARS directly.
SARS conducts regular verifications and audits to ensure that taxpayers are correctly declaring their VAT liabilities. Even though this is an effective way to identify potential fraud, it can sometimes be frustrating, time consuming and result in financial hardship for compliant taxpayers as we do not currently have legislation in place to enforce specific turnaround times for the conclusion of these investigations.
The SARS E-filing platform is also designed to identify risk when a return is submitted and may flag suspicious declarations for verifications or audits. Together with the technology utilized by SARS Customs and Excise, fraudulent import and export transactions can be easier identified and investigated. Electronic technology is making a huge contribution to the eradication of tax fraud and will certainly play a major role in future.
Generally, tax practitioners are obliged to be registered with SARS and be a member of a qualifying controlling body which regulates the profession. Unethical tax practitioners can be reported to SARS or their respective controlling bodies. This ensures that all tax practitioners are held accountable and possess the necessary skills and expertise to handle the tax affairs of their clients.
The Tax Administration Act No. 28, 2011 (TAA) also makes specific provision for criminal offences in chapter 17, which may result in a fine or imprisonment. Prosecution under this section in not only limited to the taxpayer but also includes any person who intentionally evades or assist another person to evade tax. Only a senior SARS official may lay a complaint with the South African Police Service or the National Prosecuting Authority for evasion of tax and obtaining undue refunds by fraud or theft.
SARS has been very successful in combatting fraud and the following examples are evident that not only taxpayers are prosecuted but also SARS officials and tax practitioners:
It is often necessary for National Treasury and SARS to amend legislation to combat fraud. The most recent example of a legislative intervention is a proposed amendment to the Value-Added Tax Act, 1991 (VAT Act) to curb fraudulent activities in the supply of second-hand goods in the gold industry. A Domestic Reverse Charge Mechanism (DRCM) was proposed to curb VAT fraud schemes in terms of section 74 of the VAT Act. The policy objective of the DRCM is an anti-abuse measure aimed at removing the opportunity for fraudulent vendors to re-characterize gold and goods containing gold, which historically resulted in large amounts of VAT refunds being fraudulently extracted from the fiscus.
Various amendments to section 16 of the VAT Act have also been promulgated in the last 5 years to ensure that documentary requirements are clearly defined to avoid situations where taxpayers are claiming input tax deductions which cannot be substantiated. To this effect, SARS issued Interpretation Note No. 92 which provides a detailed listing of the specific source documents required for certain transactions. For example: Insurance indemnity payments made by insurers, input tax deductions relating to betting transactions, input tax deductions in respect of second-hand goods.
SARS also issued Interpretation Note No. 30 to explain the requirements that need to be adhered to where movable goods are exported. A zero-rated sale often results in a taxpayer receiving refunds from SARS as they are generally still entitled to claim input tax deductions which relates to their enterprise activities. This is often a target for fraudsters to obtain undue VAT refunds. The Interpretation Note provides clarity in respect of both the qualifying criteria for a zero rated exported together with the documentary proof required to substantiate the export.
Balancing the impact of fraud with delaying compliant VAT refunds
The office of the Tax Ombud released its 8th anniversary report in October 2021 in which the top 10 most common complaints by taxpayers against SARS were noted Fair Play 22 Anniversary edition.pdf (taxombud.gov.za).
At least 7 of the 10 complaints related to potential cash flow implications for taxpayers either as a result of refunds not being paid timeously, unwarranted stoppers placed on refunds, refunds being recalled after payment, bank details having to be verified before releasing refunds, over deducting payments from bank accounts, not receiving outcomes of objections or SARS not finalizing disputes within the legal time frame.
It is evident that there is a huge impact on taxpayers if they operate within the framework of the law and they are jeopardized by not receiving their refunds. Vendors, irrespective of the size of their operations, are dependent on cash flow to ensure their overheads can be covered, especially in the trying economic climate we are experiencing globally. A delayed VAT refund may result in the collapse of many businesses.
There are multiple factors that result in VAT refunds for taxpayers, for example: decrease in sales, zero rated sales, seasonal fluctuations of stock purchases and sales, acquisition of assets, capital expansion and multiple other factors. Many of these variants occur at specific time intervals which can in some instances be pre-empted by SARS by monitoring a taxpayer’s VAT returns. For example: a taxpayer who makes only zero-rated supplies will be in a VAT refund position every time a return is submitted.
Even though SARS has made progress in expediting VAT refunds, taxpayers are still subjected to verifications by SARS whenever a return for a refund is submitted. As this is a cash outflow for the fiscus, it is imperative that utmost care must be taken to avoid unscrupulous fraudsters from obtaining refunds, but it must also be balanced not to jeopardize the existence of businesses conducted by honest taxpayers.
What exasperates the situation is also the lack of legislation to compel SARS to release a refund within a given time frame. This sometimes results in SARS holding back refunds which are not subject to verification or not releasing refunds which have already been verified. Even though the VAT Act makes provision for SARS to pay interest on delayed refunds after 21 days of submitting a return, in practice, this is often not paid, and the taxpayer must then submit a written request for interest.
The current provisions in the VAT Act makes it more of a challenge for a taxpayer to receive interest on delayed refunds as there are various requirements before interest can be paid for example: a return is incomplete or defective, outstanding returns for other taxes administered by SARS, not furnishing bank details. These requirements are not aligned with other taxes administered by SARS and therefore places an additional burden on VAT vendors.
Amendments have been drafted to align the VAT Act with the TAA but is still to be promulgated. This will even the playing field for VAT vendors and at least compel SARS to automate interest calculations on delayed refunds which should result in improved turnaround times to release refunds.
Fraud remains a big problem for all South Africans, and it can only be combatted if everyone takes responsibility to fight this crime.
Article as seen in Tax Talk February Edition