A ‘voluntary’ disclosure in SARS’ VDP process: Get it right the first time!

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What is the Voluntary Disclosure programme?  

The Voluntary Disclosure programme (VDP) is a mechanism prescribed for in sections 225 to 233 of the Tax Administration Act No. 28 of 2011 (TAA) which allows taxpayers who are in default of their tax affairs to voluntarily disclose and regularise their tax affairs with the South African Revenue Service (SARS) and escape the would be ramifications of such a default which include criminal prosecution, understatement penalties and other penalties imposed by the TAA and other tax acts. 

Why does SARS have the VDP?

The purpose of the VDP is to enhance taxpayer compliance to ensure good management of the country’s tax system and SARS’ resources. 

The ‘voluntary’ in VDP

In terms of section 226 of the TAA, a person may apply for VDP in their personal, representative, withholding or other capacity, unless that person is aware of a pending audit or investigation into the affairs of the person seeking relief, or an audit or investigation has commenced but not yet been concluded. Section 226 is the precursor to section 227. The latter, lists the requirements of the VDP, one of which is that the disclosure must be voluntary and must therefore not be a reaction to a notification of a commencement of an audit in terms of section 42 of the TAA, and, as will be seen below, a reaction to a warning from SARS regarding a default.

In the case of Purveyors South Africa Mine Services (Pty) Ltd v The Commissioner for the South African Revenue Service (61689/2019) [2020] ZAGPPHC 409 (25 August 2020) a taxpayer that suspected that they ought to have paid VAT on the import of an aircraft communicated their suspected non-declaration to SARS representatives who confirmed that the taxpayer should have paid import VAT on the aircraft and that it would be liable for penalties and interest owing from its default. A year later, the taxpayer applied for VDP but was denied VDP relief because, notwithstanding the fact that there was no notification in terms of section 42 of the TAA, it was found that the taxpayer’s VDP application was not voluntary because it was applied for after the taxpayer had been warned that it would be liable for penalties and interest owing from its default. The court’s reasoning at paragraph 12 explained that the word “voluntary” means:

“ ‘an act in accordance with the exercise of free will’. If there is an element of compulsion underpinning a particular act, it is no longer done voluntary. In the context of Part B of Chapter 16 of the TAA, a disclosure is not made voluntary where an application has been made after the taxpayer had been warned that it would be liable for penalties and interest owing from its mentioned default.”

Comment 

The Purveyors case showed us that, when seeking to utilise and take advantage of VDP relief, it is imperative that all the requirements are met; one of these being that the application must be made in the prescribed form and manner in terms of section 227(f) of the TAA. In Purveyors, had the initial communication to SARS been made in the prescribed form and manner, the taxpayer might have been able to avail itself to the VDP relief. 

It is also noteworthy that even if the VDP application is not voluntary, a person may still apply for VDP in terms of section 226(2) if SARS is of the opinion that the default that the person seeks to regularise would not have been detected by SARS during the audit or investigation and such an application would be in the interest of good management of the tax system and the best use of SARS’ resources. Purveyors failed in this respect because it made a non VDP disclosure to SARS, thus giving SARS all the information in respect of the default prior the formal VDP application. True to this, in Reed v Minister of Finance and Others [2017] ZAGPPHC 987, where the High Court dealt with the question of when a disclosure is voluntary, at paragraph 35 Louw AJ held:

“If somebody knows something then it is difficult to see how, without straining language into incomprehensibility, another person can "disclose" the thing known to the first person. Determining whether something is (disclosable) is not a subjective matter but is purely objective - does the person have knowledge of the thing or not; if not, it can be disclosed, if yes it cannot be disclosed.” 

This is again an example of why all the requirements of a valid VDP application must be met when seeking to take advantage of the relief. It is therefore imperative that a person considering making a VDP application must be decisive and accurate in doing so in order to take advantage of the relief.                                             

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