Putting the "Voluntary" in Voluntary Disclosure Applications

Applications under the voluntary disclosure programme (more commonly referred to as VDPs) are a useful tool for taxpayers wanting to “come clean”. These applications are available to taxpayers who defaulted on their tax obligations, whether intentionally or out of ignorance, in terms of Part B of Chapter 16 of the Tax Administration Act No. 28 of 2011 (“the TAA”).

The successful conclusion of a VDP agreement protects taxpayers from criminal prosecution as well as most penalties (including understatement penalties). The VDP regime is therefore extremely beneficial to taxpayers who could otherwise have faced severe penalties.

Importantly, the benefits of a VDP are only available to taxpayers upon a successful conclusion of a VDP agreement with SARS, which may be many months after submission of the VDP application.

After submission of a VDP application, the VDP Unit will first evaluate whether the applicant meets the relevant requirements before a VDP agreement can be signed. The requirements, which are contained in section 227 of the TAA, are that the disclosure must:

Be voluntary;
Involve a ‘default’ as defined which has not occurred within five years of the disclosure of a similar ‘default’ by the applicant;
Be full and complete in all material respects;
Involve a behaviour referred to in column 2 of the understatement penalty table; and
Be made in the prescribed form and manner.

In recent years, SARS’s VDP Unit seems to have become increasingly strict in their evaluation of whether the “voluntary” requirement has been met. SARS has also now, in the Draft Guide to the Voluntary Disclosure Programme (‘the Draft Guide’) that was issued for public comment on 20 October 2021, indicated that they follow a strict interpretation to determine whether an applicant meets the requirements of a valid VDP. The purpose of the VDP is clearly to encourage taxpayers to voluntarily disclose tax defaults to SARS. However, as stated in the Supreme Court of Appeal case Purveyors South Africa Mine Services (Pty) Ltd v CSARS (135/2021) [2021] ZASCA 170 (7 December 2021) at paragraph 20, “no purpose would be served if the TAA enables errant taxpayers to obtain informal advice and when it does not suit them, to then apply for voluntary disclosure relief”.

The Draft Guide espouses the dictionary definition of the term “voluntary” as meaning “done, made, or given willingly, without being forced or paid to do it”.

The Purveyors decision reinforced the position that a disclosure will not be regarded as voluntary where SARS had prior knowledge of the default (whether by the taxpayer’s own admission to SARS or not). This case is a painful reminder to taxpayers wanting to apply for a VDP to be careful of disclosing information to SARS otherwise than by way of a formal VDP application.

It may also be questioned whether a disclosure is voluntary where a taxpayer is under audit or verification.

Section 226 of the TAA states that the disclosure of a default will not be regarded as voluntary if the person seeking relief has been given notice of the commencement of an audit or criminal investigation into the affairs of the person, which has not been concluded and is related to the disclosed default. If the default would not have been detected during the audit or investigation and the application would be in the interest of good management of the tax system and the best use of SARS’ resources, a senior SARS official is granted the power to regard the disclosure as being voluntary, despite the above notice of commencement of an audit or criminal investigation having been given.

The question arises as to what is meant by the term “audit”, as this term is not defined in the TAA.

In the Draft Guide, SARS states that an “audit” is “a formal examination of the financial and accounting records and needs to include the supporting documents of the taxpayer to determine whether the taxpayer has correctly declared its tax position to SARS. An audit is considered to commence once a Notification of Audit letter is issued to the taxpayer and is concluded once a Letter of Findings is issued to the taxpayer.”

On the other hand, the Draft Guide states that a “verification” is “the process of verifying the information declared by the taxpayer on the declaration or in a return submitted to SARS. This is done by comparing the information in the return against the financial and accounting records (such as the trial balance or income statement) to ensure that the declaration or return is a fair and accurate representation of the taxpayer’s tax position.” The Draft Guide states that a request by SARS for the submission of an Income Tax Supplementary Declaration (commonly referred to as an IT14SD) is an example of a verification.

The Draft Guide also, correctly in our view, states that section 226(2) refers only to the word “audit” and does not include inspection or verification and that, based on the principle expressio unius est exclusion alterius (the expression of one thing is the exclusion of another), an inspection or a verification is not an “audit” for purposes of section 226(2). Therefore, a request by SARS for the completion of an IT14SD return should not automatically disqualify the taxpayer from applying for the VDP relief in terms of section 226(2).

SARS however, correctly as confirmed by the Purveyors case, sees the deemed exclusion from a disclosure being voluntary following notification of an audit or criminal investigation in terms of section 226(2) as separate from the stand-alone requirement that the disclosure be voluntary as one of the requirements for the VDP in terms of section 227.

The Draft Guide states that a VDP application made by a taxpayer subsequent to the taxpayer becoming aware of a possible default as a result of SARS requesting an inspection or verification related to the default will not be considered “voluntary”. This is because, had it not been for the inspection or verification related to the default, the taxpayer would not have applied for the VDP. This proposition was confirmed in the Purveyors case, which held that the taxpayer had not made a voluntary disclosure, among other things because its VDP application was prompted by compliance action on the part of SARS which was aware of the default. At paragraph 20 of the judgment, Mathopo JA states: “The purpose of the application is designed to ensure that errant taxpayers who are not compliant must come clean, out of their own volition and without any prompting, to make amends in respect of their defaults by informing SARS.”

It is self-evident that if SARS is aware of a taxpayer’s default, then the taxpayer would not be making a “disclosure” to SARS if it were to tell SARS about the default. As stated in Reed v Minister of Finance and Others [2017] ZAGPPHC 987, “if somebody knows something then it is difficult to see how, without straining language into incomprehensibility, another person can ‘disclose’ the thing known to the first person.”

Although the relief granted under a successful VDP application may be extremely beneficial to a taxpayer, it is evident from the above discussion that there are numerous circumstances in which taxpayers will not qualify for this relief on the basis of the disclosure not being voluntary, among other requirements. Care should therefore be taken in deciding whether a VDP application is the appropriate mechanism to rectify defaults in disclosures made to SARS and taxpayers are advised to consult their tax advisors in this regard.