The South African Revenue Service (Sars) has lost a case against retail company Henque 3935cc, trading as PQ Clothing Outlet, in a long-running battle over tax refunds worth over R1-million.
The Supreme Court of Appeal ruled that Sars was not entitled to use value-added tax (VAT) refunds owed to the company to settle older tax debts, as those debts were incurred before the company entered business rescue.
According to information submitted before the court, Henque operated around 40 clothing and beauty product stores nationwide. In early 2018, the company faced financial trouble and entered business rescue in January 2018.
Before the company went into business rescue, it submitted its tax return for the 2017 financial year, declaring a loss of R46 000. Based on this, no tax was due.
However, Sars informed Henque that it would audit the return.
“On 1 May 2018, the business rescue plan and all the annexures were served on Sars. On 13 June 2018, the creditors held a meeting to consider and approve the business rescue plan.
“On 2 August 2018, Sars lodged a claim with the business rescue practitioner, recording the 2017 additional assessment as a pre-business rescue debt.
“The business rescue practitioner also submitted Henque’s VAT returns for the period 06/2018 to 03/2019,” reads the court papers.
At this time, Henque had accumulated a VAT credit of more than R1-million. Sars initially approved the refund but later withdrew it, using the amount to pay off the 2017 additional tax liability and VAT for January 2018.
Sars claimed that these were post-business rescue debts and, therefore, not protected by the rescue plan.
However, Henque disputed this and went to the high court to argue that both the income tax for 2017 and the VAT for January 2018 were debts created before it entered business rescue on January 1, 2018, even though they were only finalised or assessed later.
Henque said that the law focuses on when the liability arose, not when it was calculated or paid.
Sars disagreed, stating that the debt only became valid when it issued the notice of assessment or when the return became payable, which was after the business rescue had begun.
The SCA stated that the income debt for 2017 financial year was owed at the end of that year before the business rescue began. Even if the amount was later revised by Sars, the underlying liability existed earlier.
The court further stated that the debt for January 2018 was also a pre-business rescue liability because the relevant transactions took place before or on January 31, 2018.
The VAT return submitted later, on March 1, 2018, merely quantified the debt.
“It is therefore a pre-business rescue commencement liability payable in terms of the business plan.
Both the income tax and VAT debts are not capable of being set off against the VAT refunds, which became payable to Henque after the commencement of business rescue,” reads the judgment.
The appeal was upheld with costs.
The court also declared the income tax and VAT liabilities arising from periods ending on or before January 1, 2018 were pre-business rescue debts.
“These debts cannot be used to offset Sars’s own liabilities, such as VAT refunds, to Henque that arose after the business rescue began,” the court said.
