PARTICIPATION IN FRAUDULENT TRANSACTION CARRIES HIGH PRICE

A4_BThe facts pertaining to a case recently heard by the North Gauteng Tax Court make excellent material for a mystery novel …

Mr A, an accountant by profession, was approached by Mr B and Mr C to enter into a business arrangement. The two men are in some way related to a woman who works in the office of Mr A’s family business. Unfortunately there is no further information regarding this woman’s role in the whole affair. Although Mr A is not a close friend of the two men, they did meet socially from time to time. It was perhaps during one of these social gatherings that B and C proposed that Mr A set up XYZ CC as a business supplying seafood. B and C promised to order enough seafood from him to keep him in business.

The plot thickened when B and C requested Mr A to issue fictitious VAT invoices on behalf of XYZ to their own corporation, PQR CC. They contended that they want to raise a loan from a bank and needed the invoices to convince the bank that they required the loan for purchasing stock. B and C gave very specific instructions with regard to the issuing of the invoices, specifying the fictitious supplies and the amounts. According to Mr A, he was “badgered on a daily basis until he relented” and XYZ issued three invoices for a total value of R1 024 397.16 (including VAT) to PQR.

Obviously, no seafood was ordered, purchased or delivered. In the words of Hiemstra JA, Mr B and Mr C “wanted to use the money for some nefarious purpose”. The bank approved the loan on the basis of the invoices and paid the amount into XYZ’s bank account. As per agreement, XYZ then refunded the full amount to PQR by means of three cheques. With the money in their pockets, B and C fled the country, leaving Mr A to deal with SARS.

And why did XYZ have tax problems? Because B and C were not satisfied with only defrauding the bank. They added insult to injury by submitting an input claim in respect of the R125 803.14 VAT included in the amount of the three invoices.  SARS conducted an audit to establish whether the suppliers listed by PQR accounted for the corresponding output tax. As XYZ did not have any stock to begin with, did not supply any stock and was forced to transfer the full amount of the loan immediately upon receipt, Mr A thought it wise to submit a nil VAT return for the relevant periods.

In doing so Mr A, the accountant, failed to take into account one of the most basic principles of the VAT system. Unless a vendor has been granted permission to account on a payment basis, the liability for VAT arises when an invoice is issued.  Whether or not the vendor receives payment is irrelevant, because the person to whom the supply was made is in turn entitled to claim input tax on the basis of that invoice.

The court decided that whatever the background to the transaction may be, XYZ remains liable for the VAT in respect of the three invoices, as well as the 200 percent additional tax imposed by SARS.

There are many lessons to be learnt from Mr A’s experience. We can all strive to be better judges of character and perhaps steer clear of transactions involving seafood. However, the one lesson that all vendors need to take home is this:  SARS does not suffer fools gladly. Whatever the circumstances, a vendor remains liable for output VAT in respect of any and all invoices issued.

This article is a general information sheet and should not be used or relied on as 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 financial adviser for specific and detailed advice.

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