If the ink is dry: Court confirms that SARS is bound by terms of settlement agreements

By Dewald Pieterse

Introduction

In a significant victory for taxpayer rights and the principle of legal certainty, the High Court (Gauteng Division, Pretoria) recently handed down judgment in the matter of Inhlakanipho Consultants (Pty) Ltd v Commissioner for the South African Revenue Services (A333/2024) [2025] ZAGPPHC 1210 (‘Inhlakanipho Consultants v CSARS’). Delivered on 25 November 2025, this judgment confirms that the South African Revenue Service (‘SARS’) cannot hide behind internal system limitations or administrative inconvenience to escape the binding terms of a lawful settlement agreement. For taxpayers, tax practitioners and legal representatives alike, this case serves as a powerful reminder of the importance of a well-structured settlement agreement, and the judgment emboldens taxpayers and their representatives in holding SARS to its word.

Salient background facts

The roots of the dispute lay in a long-standing disagreement regarding VAT assessments for the 2010/04 and 2014/02 tax periods of Inhlakanipho Consultants (‘the taxpayer’). After partial disallowance of objections by the taxpayer and a subsequent appeal to the Tax Court, the appeal was resolved through the alternative dispute resolution (‘ADR’) process which culminated in September 2018 with the parties signing a written settlement agreement. The terms were explicit and seemingly simple in that the taxpayer would pay a final agreed capital amount of approximately R5.9 million, and SARS would revise the assessments to reflect this reduced liability. It was agreed that once the capital was paid, interest would be calculated on the revised figures. The agreement was explicit that it represented the ‘final agreed position’ between the parties and it was clearly intended that the agreement would bring an end to the dispute regarding the taxpayer’s liability for the periods in question.

Pursuant to the agreement, the taxpayer upheld its end of the bargain, paying the agreed R5.9 million. Contrary to the agreed terms, however, SARS allocated the payment not to the outstanding principal debt but instead applied it in reduction of the combined amount resulting from the original assessment, understatement penalties and accrued interest taken together. The result was that the taxpayer’s payment ‘was insufficient to touch the principal debt as it only discharged interest and penalties.’ The prejudice to the taxpayer was therefore compounding in that interest continued to accrue on the principal debt, seeing as the principal capital debt remained legally outstanding on SARS’s system due to payment having been allocated to penalties and interest, despite the settlement agreement stating that payment would extinguish the principal debt. SARS justified this about-face by relying on section 166 of the Tax Administration Act 28 of 2011 (‘TAA’), which generally governs the allocation of payments by providing inter alia that ‘SARS may allocate payment made in terms of a tax Act against an amount of penalty or interest or the oldest amount of an outstanding tax debt at the time of the payment’ (own emphasis).

SARS contended that its internal accounting systems were designed to follow section 166 of the TAA and could not process the payment as agreed in the settlement ‘without a significant overhaul of current systems and procedures’. Essentially, SARS argued that its own administrative processes rendered the specific terms of the settlement impossible to perform.

The court a quo and the High Court’s intervention

The court a quo found in favour of SARS, accepting SARS’s argument that it was practically impossible to implement the agreement due to the aforesaid system constraints. The lower court effectively ruled that the internal administrative procedures of SARS trumped the agreed contract, leaving the taxpayer in a precarious position despite the matter having been settled and encapsulated in a binding contract.

On appeal, however, the High Court completely overturned this decision, delivering a scathing critique of SARS’s conduct and the uncritical acceptance of SARS’s argument by the lower court. The Court emphasised that the settlement was concluded lawfully under section 148 of the TAA, subsections (1) and (2) of which provide as follows:

‘(1) The settlement agreement represents the final agreed position between the parties and is in full and final ‘settlement’ of all or the specified aspects of the ‘dispute’ in question between the parties.

(2) SARS must adhere to the terms of the agreement, unless material facts were not disclosed as required by section 147(1) or there was fraud or misrepresentation of the facts.’ (own emphasis.)

In other words, once settlement agreements are entered into, they are binding on both parties. The use of the word ‘must’ (as opposed to the word ‘may’ in section 166) makes it clear that there is no discretion in this respect, unless in the specific circumstances identified. The Court noted that SARS must have entered the agreement with eyes wide open, fully aware both of the implications of section 148 and that its internal system capabilities would therefore present a difficulty in honouring the terms of the agreement.

The High Court rejected SARS’s claim that its system could not accommodate the agreement as a ‘bare allegation’ rather than a valid legal justification, agreeing with the taxpayer that SARS’s plea ‘that it would be subjected to inconvenience is no defence at all’. Emphasising the lack of evidence to support SARS’s position, the court further stated that the ‘bare allegation is hearsay, unsubstantiated and clearly in conflict with the agreement and yet this was surprisingly accepted uncritically [by the court a quo] and elevated to the status of established fact, grounding the finding of impossibility.’ The High Court identified a fatal evidentiary gap in SARS’s case in that SARS had failed to adduce expert testimony or technical evidence to substantiate the claim that its systems could not be overridden. By merely asserting this limitation without proof, SARS’s defence was correctly categorized as inadmissible hearsay. This establishes an important precedent: SARS cannot rely on the ‘black box’ of its IT systems as a shield against contractual obligations without providing the court with concrete evidence of the alleged technical impossibility.

Furthermore, the judgment effectively resolves the apparent conflict between section 148 and section 166 in these situations. The Court’s approach aligns with the interpretative maxim generalia specialibus non derogant (general provisions do not derogate from special ones). Section 166 is a general administrative provision conferring on SARS a discretionary power to allocate payments in certain ways. In contrast, section 148 is a specific, substantive provision imposing a mandatory obligation on SARS to adhere to settlement agreements. The High Court thus confirmed that a discretionary administrative power cannot be exercised in a manner that negates a mandatory statutory obligation.

In consequence, the High Court set aside the court a quo’s order and declared that the taxpayer was not indebted to SARS for the disputed periods, save for the calculation of interest as originally agreed.

Conclusion – the implications for taxpayers

This judgment is a boon for tax certainty in South Africa. It reinforces the sanctity of contract and reaffirms that the state and its functionaries are not above the law. When SARS signs a settlement agreement under the TAA, they are strictly bound by its terms (barring material non-disclosure, fraud, or misrepresentation) and cannot later rely on, for example, internal policies or administrative difficulty to renege on the terms of the agreement. This offers significant reassurance to taxpayers regarding the ADR process and settlements generally, and emboldens taxpayers and their advisors to hold SARS to its word in the knowledge that the courts will enforce settlement agreements on their explicit terms.

The favourable outcome for the taxpayer in this judgment rested heavily on the clarity of the settlement agreement in respect of payment allocation. This highlights the importance of drafting settlement terms with precision and explicitly recording in writing important aspects such as payment allocation.

Going forward, practitioners are advised to look beyond the standard terms. Future settlement agreements should ideally contain a specific clause explicitly recording the precise manner in which payments will be allocated, by which SARS effectively waives the right to rely on section 166 or automated allocation rules to defeat the agreed payment terms.

Ultimately, the judgment serves as a welcome check on administrative power, confirming that SARS cannot act arbitrarily or in a ‘contrived and self-serving’ manner to the detriment of taxpayers. It is encouraging to see the court appreciating that, given SARS’s position in our constitutional democracy, ‘confidence in agreements entered with it and its abiding with the terms of those agreements is paramount.’ Inhlakanipho Consultants v CSARS is a triumph for the rule of law, assuring taxpayers that a ‘full and final settlement’ as agreed with SARS truly is both ‘full’ and ‘final’.

A final observation is that when this judgment is considered alongside the Constitutional Court’s judgment in CSARS v Medtronic International Trading S.A.R.L. 87 SATC 390 (20 December 2024), the full picture emerges. In that case, the apex court ruled against the taxpayer, holding that it was strictly bound by the terms of a Voluntary Disclosure Agreement with SARS and could not subsequently seek interest remission on different terms. The message from the judiciary is now unequivocal to both taxpayers and SARS: if the ink is dry, the terms apply.