The South African Revenue Service (Sars) has issued further guidelines for companies and individuals wanting to apply for Covid-19 relief. The latest set applies to large businesses with gross income of more than R100 million, and small businesses with gross income of less than R100 million.
It goes without saying that the taxpayer must be tax compliant, and up to date with all tax payments.
Applying for the waiver of penalties for tax debt
Subject to the requirements set out below:
- Larger businesses can apply to defer tax payments without incurring penalties, by submitting the application to Covid19IPAaboveR100m@sars.gov.za.
- Smaller businesses can apply for an additional deferral of payments without incurring penalties by submitting the application to Covid19IPAbelowR100m@sars.gov.za Note the requirements below.
The taxpayer is required to meet three qualifying requirements before applying for relief.
The taxpayer must have suffered “serious financial hardship” which must be attributable to the effects of the Covid-19 disaster; the effects must be “substantial and material”, and the taxpayer must prove to Sars that an instalment payment arrangement (IPA) is required because of the impact of Covid-19.
Only if all three requirements are met will the remittance of the penalty be considered.
Serious financial hardship
The taxpayer will have to link its “serious financial hardship” to the effects of the Covid-19 disaster.
Sars has not provided any clarity in regard to what “serious financial hardship” is. For example, if the taxpayer has lost 20% of income, is this serious? Does it make a difference if the 20% equals R100 000 or R100 million?
Sars’s response: “Hardship relates to whether your business has suffered negative cash flow impact as a result of Covid-19 and the business is not able to pay all the tax liability when such becomes due.”
No clarity as to how to define ‘substantial and material’
Sars was also asked to clarify what is meant by substantial and material.
Sars’s response: “Every case will be considered on its own merit. Taxpayers must substantiate their situation and provide proof for Sars to consider. A formal application with supporting documents will be required.”
Bowmans partner Patricia Williams remarks that the term ‘material’ is relevant, since Sars’s decision will be governed by the Promotion of Administrative Justice Act (Paja), “and such a decision would need to be justified by reasons if a person’s rights were ‘materially and adversely affected’”.
Williams further ventures that within the Paja context, the term ‘material’ is “based on the meaning that the thing matters, or is not immaterial, and so this includes a relevance aspect as well as that the amount must not be so insignificant that a court would disregard it (in terms of the de minimis non curat lex principle; ‘the law does not concern itself with the trivial’).
The auditing or accounting meaning of ‘material’ is different, “where one may have a certain percentage of total assets or revenue as a materiality threshold.”
Williams also reflects that where a large legal firm is involved, the administrative justice arguments would be strongly made. However, where does this place smaller taxpayers who are not that sophisticated? Will Sars be more sympathetic?
Elle-Sarah Rossato, tax controversy and dispute resolution lead at PwC, notes that Sars “might suffer to (a) deal with all the requests of above R100 million taxpayers; (b) make sense of ‘substantial and material’ as well as ‘serious hardship’; and (c) struggle to be consistent with outcomes to ensure that all suffering taxpayers are treated fairly and reasonably as suggested by government and National Treasury.”
The taxpayer must prove their case
Sars does not clarify how a taxpayer can prove to Sars that an instalment payment arrangement is required as a result of Covid-19. The taxpayer will have to provide proof that the loss of sales and the increase in costs, and therefore the impact on liquidity, is as a result of Covid-19.
What if the taxpayer has recently paid a dividend? Sars’s response: “It will be difficult for taxpayers to claim hardship while they are able to pay a dividend. Sars sees such cases in a serious light.”
Documents to be submitted
- Letter requesting deferred arrangements, the reasons for the request, and the specific tax periods.
- The latest annual financial statements and management accounts.
- A list of debtors and creditors; an age analysis of debtors may be useful to demonstrate that debtors are not able to pay.
- Cash flow projections for the next three months; these should take into account all additional costs resulting from Covid-19 – for example: not being able to clear goods through customs and incurring storage costs; costs associated with personal protective equipment, additional costs in setting up IT platforms for online sales and for staff to work from home, and so on.
It is to be noted that Sars is not able to forecast its own tax collections over the next few months, yet it expects this of taxpayers.
Other complicating factors
Rossato observes that “a further complicating factor is that deferral proposals are considered by the debt management divisions of Sars, while remissions of penalties and interest are considered by account maintenance”.
She raises a further worrying issue concerning repeat deferrals: “For instance, company A obtains a deferral for [value-added tax] Vat in May 2020 but then finds itself in exactly the same predicament in June and July 2020. Will they have to go through the above process repeatedly, or only have to send a further letter? This would be on the basis that nothing materially has changed in which case a whole new application will then have to be filed.”
These small amendments signify the latest round of Sars’s attempts to alleviate the financial stress suffered by taxpayers, but they may not be enough.