Disclose your defaults before SARS finds them!

A grim warning for South African taxpayers.

Long gone are the days when tax fraudsters could run circles around SARS, which has intensified its efforts to crack down on tax evasion by pursuing criminal action against non-compliant taxpayers. One example is when SARS came knocking on the door of a private hospital and its director, charging them both with tax fraud.

The chickens coming home to roost

A private healthcare facility was recently charged with alleged PAYE, VAT, and income tax fraud in excess of R500 million, while the director was similarly charged with alleged tax fraud to the tune of R750 million. Upon conviction, the parties involved could potentially face a prison sentence of up to 40 years. This conviction makes it abundantly clear that SARS is no longer allowing tax fraud to run rampant without any remedial action on its part. The SARS Commissioner has often stated that voluntary compliance should be made easy, while non-compliance should be a difficult and costly experience.

The VDP: An opportunity to come clean

Fortunately, the Tax Administration Act 28 of 2011 provides a saving grace to taxpayers who come clean to SARS. This mechanism is called the Voluntary Disclosure Programme (VDP). A VDP application to SARS is the only way to avoid severe penalties, and possibly even prison time.

SARS agrees to grant amnesty from criminal prosecution and to waive all understatement penalties where the taxpayer approaches SARS with a VDP application before notification of audit or criminal investigation except for instances of gross negligence and intentional tax evasion, where the penalties are charged at 5% and 10% respectively.

A taxpayer’s VDP application must comply with certain requirements:

• The disclosure must be submitted before the taxpayer is notified of an audit or criminal investigation by SARS;
• The disclosure must be made voluntarily;
• A disclosure must not have been made for a similar ‘default’ in the preceding five years;
• The disclosure must be fully described and complete in all material aspects;
• The disclosure must not trigger a refund due by SARS; and
• The disclosure must be made in the prescribed form and manner.

Thereafter, should the VDP application be accepted by SARS, then a VDP agreement is concluded between the taxpayer and the SARS Commissioner. Therein, the material facts of the matter are outlined, and a payment plan for any amounts due to SARS is agreed on. In turn, SARS agrees to waive any criminal prosecution and remit any understatement penalties. However, interest is always payable.

Come forward now!

Hopefully, South Africans will take heed of this warning, and a change in tax morality could be sparked. Taxpayers whose tax affairs are in a state of disarray should promptly take action to disclose their default to SARS in the correct manner, and appoint astute tax attorneys to assist with this process. Timing is of the essence as should SARS come knocking before your disclosure, the avenue of VDP is unavailable, and prison time potentially beckons.

WRITTEN BY Andre Daniels AND Richan Schwellnus

• Andre Daniels is the legal manager for tax controversy and dispute resolution at Tax Consulting SA.
• Richan Schwellnus is a tax associate at Tax Consulting SA.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)