Kissed by an angel

Accountancy SA,  May 2003  by Webb, Penelope

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The Irish, amongst whose number are some of the greatest modern writers of English literature, are fond of saying that anyone who escaped tragedy and disaster was kissed by an angel. Those who have survived an armed robbery would undoubtedly agree.

The success rate of the South African Police Service in securing the conviction and sentencing of these villainous criminals is disappointingly low. On the other hand, the South African Revenue Service appears to be enjoying more success in arresting those accused of tax fraud and other white-collar crimes such as smuggling. Let's hope that, on conviction, the Courts impose salutary sentences and that the accused do not benefit from Solon's law. Solon, you remember, was a Greek philosopher who said that laws are like a spider's web. The weak are caught while the strong escape.

Writing in Accountancy, the journal of the Institute of Chartered Accountants in England and Wales, a distinguished forensic auditor said recently that if he were asked by aspiring fraudsters to suggest fruitful areas for exploitation he would unhesitatingly suggest VAT. Complex rules lend themselves to dishonest manipulation but far more common - and here readers and their clients should beware - is the use of false VAT registration numbers. The astute fraudster, it seems, has two registration numbers: one genuine and one false. The numbers are not pre-printed on tax invoices but are added manually so that if a customer questions the validity of a registration the crooked supplier can claim that the incorrect number was an accident.

Can the business that paid the VAT in good faith claim an input credit? It seems that, in practice, SARS allow an input tax credit but that practice might change especially as the integrity of a VAT registration number can now be easily verified.

As in other areas like banking, South African technology is considerably more sophisticated than that used in Britain. Here, a visit to SARS website at www.sars.gov.za will determine in seconds whether a VAT registration number is genuine and readers and their clients should not hesitate to avail themselves of this facility. South African VAT yields R70 billion a year to the Government and even a 1% shrinkage rate means that fraudsters could be enjoying a handsome, tax-free, lifestyle.

Lord Denning, that great English judge renowned for the equity of his judgments, surprisingly held that a well-organised gang of burglars was not carrying on a trade and could not be subjected to income tax. That proposition is surely not acceptable here. In a Scottish case the judge summed up the matter eloquently:

"...The burglar and the swindler who carry on a trade or business for profit are as liable to tax as an honest man and, in addition, they get their desserts elsewhere..."

Ten years' desserts one hopes.

In a case in Zimbabwe, a Government official misappropriated large sums of money with which he was entrusted for secret and sensitive projects. He was convicted and sentenced to imprisonment, part of which was suspended on condition that he paid all the money back. He repaid all the money and, when assessed to income tax on the ill-gotten gains, his counsel submitted that he had not 'received' the money in an income tax sense. Counsel submitted that a man who borrows his neighbour's lawnmower receives it in the broadest sense of the term but would clearly not receive it within the meaning of the word in the income tax definition. The Chief Justice accepted the argument and Revenue lost the case.

What of the fraudster who sells stolen goods in the course of his otherwise legitimate business? Is he liable to pay VAT on the sale of the stolen goods? There is little doubt that the definition of 'supply' in the VAT Act is capable of wide interpretation. There is case law in South Africa and the UK to suggest that supply includes the transfer of possession of goods and not simply the transfer of legal title. In view of SARS new found aggression in arresting offenders, one hopes that they will share their intelligence with SAPS for the benefit of the country as a whole, but the secrecy provisions of tax legislation probably prevent this.

Texchange (Pty) Limited was a curious case that SARS took on appeal to the Appellate Division. The company's sole director completed income tax returns for the years 1977 to 1982 indicating that the company conducted a flourishing business. Income tax amounting to R400 000 was paid. In fact, the company was a sham and did no business. All the income was fictitious. The sole director had a very rich wife who lent money to the company to help her husband run the business. He wanted to demonstrate to his wife and her friends that he was a successful businessman.

Inevitably, the bubble burst and a liquidator was appointed. He attempted to recover from the Commissioner the tax that had been paid. Revenue refused to refund the tax on the grounds that an assessment to which no objection has been made is final and conclusive not only against the taxpayer but also, on insolvency, against the liquidator. Counsel for the Commissioner argued that if the Court decided in favour of the liquidator, it would place Revenue in a very difficult position. A liquidator could seek to re-open an assessment ten or even twenty years after it was made.