Going concern sales and the seller’s risk

The legislation governing the zero rate for going concern sales are set out in section 11(1)(e) of the Value-Added Tax Act, No. 89 of 1991 (“the VAT Act”). In addition, SARS in their Interpretation Note 31, prescribes the documents that seller must be in possession of to place reliance on the zero rate for the sale of a going concern.

All too often we have seen sale agreements where assets are ostensibly sold as a going concern and parties incorrectly rely on the zero rate or do not have the required supporting documents.

The question then always is, what are the risks in these cases?

The majority of the risk lies with the seller and contract drafters more often than not try to protect the seller in the agreement by allowing for some form of recovery right against the purchaser for the VAT that needs to be paid to SARS if the zero rate is not allowed. These provisions though, in our experience, are hardly ever sufficient to cover all risks.

Purchase price inclusive of VAT

In terms of section 64 of the VAT Act, the purchase price will be deemed to include VAT where the transaction turns out to be standard rated as opposed to zero rated. Where this happens, the seller will be out of pocket by the VAT that needs to be paid over to SARS unless the sale contract specifically makes provision for this problem.

Late payment penalty and interest on late payment

Where VAT should have been charged at the standard rate but was zero rated, there is an obvious understatement of the VAT liability which often leads to a late payment penalty equal to 10% of the VAT not paid on time. This penalty will be raised by SARS on the seller. In addition, SARS will raise interest for late payment on the seller.

Taxpayers may be tempted to avoid the penalty and interest by merely disclosing the VAT in a later VAT period. This would, however, constitute a breach of the time of supply rules in section 9 of the VAT Act and a criminal offence that carries jail time as a sanction.

Understatement Penalty

In addition to the late payment penalty, SARS may also seek to raise an understatement penalty in terms of the Tax Administration Act, No. 28 of 2011 (“the TAA”) which varies from anything between 10% to 200% of the tax not correctly paid.

Both the late payment penalty and the understatement penalty are extremely difficult to get reduced after they have been imposed as the legislature provided SARS with a very limited discretion as to when these penalties may be remitted.  Whilst raising ignorance as a defense may seem like a viable argument to get around these penalties, there are various examples where our courts have not accepted ignorance as an excuse.

Taxpayers who are unsure about whether the sale is one of a going concern subject to the zero rate should seek expert VAT advice. With the correct guidance and processes, different avenues may also be pursued to prevent the imposition of these penalties.

Author: N Theron