Cash-strapped companies that are staring liquidation in the face sometimes resort to desperate measures to convince the court hearing an application for winding-up that they are not, in fact, insolvent and should not be wound up.
A novel and imaginative method was adopted by the company, a VAT vendor, in ITC 1865  75 SATC 250, though it is unlikely to become popular or to find its way into tax-planning manuals.
The taxpayer issued fictitious VAT invoices to create the illusion of a revenue stream
In an effort to show the court hearing the liquidation application that it was not insolvent, the taxpayer company generated VAT invoices (ostensibly genuine, but in reality bogus, and never actually given to the addressee) reflecting fictitious income as due and payable, and attested on oath that its assets included the right to the invoiced amounts.
The background was that the taxpayer, a property-owning company trading as a landlord, had rented out commercial premises to three companies in a corporate group, but only one of the companies actually took occupation of the leased premises. The arrangement with the other two companies was, according to the taxpayer, a mere “pre-emptive measure”, anticipating “a future arrangement”. However, in respect of all three companies, the taxpayer issued some 54 tax invoices for monthly rental.
As was noted above, this was done for the purpose of using the invoices to oppose an application in the High Court for the winding up of the taxpayer company.
The taxpayer sinks deeper into the mire
The taxpayer seems not to have realised that this ploy would merely drive it deeper into the mire, for SARS now joined the queue of creditors and demanded the output tax reflected on the invoices.
The taxpayer, with its back firmly against the wall and with no more income than before, and yet another creditor in the form of SARS, hammering on its door, resorted to arguing that since it had not in reality rendered the supplies reflected in the invoices, it had not under- declared output VAT.
The taxpayer claimed that the invoices in question were “pro forma invoices” that “were merely intended to demonstrate a potential revenue stream” in order to oppose the liquidation application, and argued that, since the ostensible lessee companies had not utilised the invoices to claim input tax, no output tax was due to SARS.
The taxpayer also averred that the Commissioner’s assessment letter – issued by SARS after a VAT audit into the taxpayer’s output tax liabilities – did not constitute an “assessment” as envisaged in section 31(1) – (4) of the Value-Added Tax Act (the VAT Act).
The court ruled that VAT became payable immediately once the invoices were issued
In the result, the Tax Court ruled that there had indeed been a determination, as defined in the VAT Act, by way of an assessment and, moreover, that the taxpayer, in lodging an objection, had implicitly acknowledged that there had been such an assessment.
The invoices in question, said the Tax Court, complied in all respects with the statutory requirements for VAT invoices and, in terms of the VAT Act, the taxpayer became liable for VAT as soon as the invoices were issued.
The court pointed out that the VAT Act specifically states in section 9(1) that the supply of goods or services by a vendor is deemed to take place, at earliest, at the time a VAT invoice is issued. The court commented (see paragraphs  – ) in this regard that –
“As such, whether or not the appellant received payment for renting its property, and whether or not the appellant actually enforced payment of rentals by C (Pty) Ltd and D (Pty) Ltd, are of no consequence in relation to the appellant’s liability for declaring output VAT … Furthermore, declaration of output tax … to SARS is not dependent upon a correlating claim for input tax by a vendor …. Similarly, declaration of output tax by a vendor … who rents out property, is not dependent upon whether such vendor elects to enforce performance by a lessee in terms of a lease agreement during the term of the lease.”
The Tax Court said (at paragraph ) that, in the final analysis, VAT became payable as soon as the taxpayer issued the tax invoices in question and that it did not avail the taxpayer to contend that the invoices were fictitious.
The court also said that the taxpayer had not provided a credible explanation of the tax invoices it had generated (in short, that the taxpayer could not be believed when it said that it had lied on oath to the court hearing the winding-up application) and that, irrespective of the explanation, the taxpayer was liable, in terms of the VAT Act, for the payment of output VAT as indicated on the invoices.
The court refused to overrule the Commissioner’s decision to exercise his discretion by not remitting penalties and interest, but said that it would not be appropriate, in the circumstances of this case, to impose additional tax, given the imposition of the penalty and interest.
But, said the court, the grounds of appeal relied on by the taxpayer were frivolous and an adverse costs order was warranted.
A possible sequel
Although it is not foreshadowed in the judgment, there may be a sequel to the taxpayer’s failure in the Tax Court in the form of a criminal charge of statutory perjury against its directors in relation to the affidavits filed in the liquidation proceedings, falsely attesting to rental income being due and payable to the company.
In that event, the directors may well find themselves declared delinquent in terms of section 162(5)(c), read with section 77 of the Companies Act No. 71 of 2008, and housed in genuinely rent-free accommodation for an extended period.
(Editorial comment: It is interesting that no consideration was given as to whether output VAT can be payable if no goods or services are supplied.)
VAT Act: Sections 9 and 31
Companies Act: Sections 77 and 162(5)(c)