Onus of proof, VAT and input tax

A trend has emerged recently with SARS relying more heavily on the onus of proof provisions (Section 102 of the Tax Administration Act, No. 28 of 2011, (“the TAA”)) to raise assessments on taxpayers, especially to disallow input tax credits for VAT purposes. While it is indeed well within SARS’ power to rely on section 102 of the TAA to raise assessments, it is important to understand the extent of this onus. This will allow taxpayers to identify where SARS are over extending themselves.

Section 102 of the TAA sets out the onus of proof resting on a taxpayer. Insofar as input tax credits for VAT purposes are concerned, section 102 of the TAA states that a taxpayer bears the onus of proving “that an amount or item is deductible or may be set-off;”

To prove that an input tax credit is deductible or may be set off, a taxpayer should prove entitlement to an input tax credit. To prove entitlement to an input tax credit, a taxpayer must be in position to prove that all requirements for deducting an input tax credit is satisfied. It is submitted that a taxpayer cannot be called upon to prove something that is a not a requirement for claiming of an input tax credit if the issue under consideration is disallowed input tax credits. To hold otherwise would mean that a taxpayer may be called upon by SARS to prove arbitrary facts or circumstances. This, of course, is untenable.

While section 102 of the TAA itself is silent on the standard of proof, it is trite that the standard or proof is a preponderance of probabilities. This means that a taxpayer cannot be called upon to prove beyond reasonable doubt that all requirements are satisfied.

The requirements for claiming an input tax credit may vary from case to case but generally, the requirements are:

  • The taxpayer must have acquired goods or services and must have been charged with VAT[1];
  • The taxpayer must be in possession of a valid tax invoice or other acceptable supporting document/s prescribed in the Value-Added Tax Act, No. 89 of 1991 (“the VAT Act”)[2];
  • The goods or services acquired by the taxpayer must have been acquired wholly (or partly, subject to section 17 of the VAT Act) for consumption, use or supply in the course of making taxable supplies[3]; and
  • The taxpayer must keep supporting documents as envisaged in section 55 of the VAT Act[4].

It follows that, where a taxpayer can prove satisfaction of these requirements on a balance of probabilities, the taxpayer should not be barred from claiming input tax credits.

Whether a taxpayer can discharge the onus of proof is normally tested by SARS during a VAT audit or VAT verification phase by asking a taxpayer to provide SARS with, amongst other documents:

  • An input tax schedule for the relevant period;
  • An output tax schedule for the relevant period;
  • A sample (sample sizes differ from case to case) of output tax invoices;
  • A sample (sample sizes differ from case to case) of input tax invoice;

These requests are, in our view, reasonable and in most cases, cannot reasonably be faulted. One might be tempted to enquire as to the relevance of output tax schedules and output tax invoices to the claiming of input tax. Suffice it to state that an input tax credit may only be claimed if the relevant goods are consumed, used or supplied in the course of making taxable supplies. Hence requests from SARS associated with output tax whilst the issue under consideration is input tax is indeed relevant. Taxpayers are therefore urged to comply with these requests from SARS.

The difficulty normally start after these documents are provided to SARS. It is not unheard of for SARS to raise VAT assessments to disallow input tax credits on the basis that the taxpayer has not discharged the onus of proof because, the input tax schedule provided by a taxpayer in response to a request by SARS for same is not paginated or the list of invoices on the output tax schedule is not listed chronologically. It has also transpired that one non-compliant invoice has resulted in SARS disallowing all input tax credits for the relevant period with the provided reason being – onus of proof not discharged. One looks in vain for these requirements to claiming an input tax credit.

Furthermore, these assessments typically follow with no warning or request from SARS for further documents or explanation (one might ask whether this is a breach of section 42(3) of the TAA). The basis for the assessment typically only become clear after a taxpayer lodges a request for reasons for the assessment in terms of rule 6 of the rules gazette under section 103 of the TAA.

The validity of these assessments may well be called into question. After all, as was ruled by the Supreme Court of Appeal in Commissioner for the South African Revenue Services v Pretoria East Motors (Pty) Ltd [2014] 3 All SA 266 (SCA):

“The raising of an additional assessment must be based on proper grounds for believing that, in the case of VAT, there has been an under declaration of supplies and hence of output tax, or an unjustified deduction of input tax… It is only in this way that SARS can engage the taxpayer in an administratively fair manner, as it is obliged to do. It is also the only basis upon which it can, as it must, provide grounds for raising the assessment to which the taxpayer must then respond by demonstrating that the assessment is wrong.

We find it very hard to see how the absence of page numbers, nonchronological list of invoices or one invalid tax invoices would constitute reasonable grounds for believing that all input tax credits are unjustified or that onus of proof cannot be discharged. There are, no doubt, numerous other cases where additional assessments are raised without the required proper grounds.

The current state of affairs appear to be the consequence of mindless application of standard operating procedures and while we respect that something must be done to curb fraudulent VAT claims, SARS should also respect that not all VAT claims are fraudulent. Taxpayers who find themselves in these positions should seek advice from specialised advisors to ensure that they are engaged in an administrative fair manner, that their disputes are resolved fairly and that costs are sought from SARS where possible.

Author: N Theron

[1] Section 1, definition of “input tax” read with section 16(3) of the VAT Act.

[2] Section 16(3) read with section 16(2) of the VAT Act.

[3] Section 1 of the VAT Act, definition of “input tax”.

[4] Proviso to section 16(2) of the VAT Act.