The Henque Judgment: When is a VAT debt due and payable to SARS?

By Duane Shipp

The recent judgment handed down by the Supreme Court of Appeal (SCA) in Henque 3935 CC t/a PQ Clothing Outlet v Commissioner for SARS [2025] ZASCA 56 has highlighted once again the importance of determining when value-added tax (VAT) is due or due and payable by a vendor under the Value-Added Tax Act 89 of 1991 (VAT Act). Previous case law has dealt with this issue in different contexts and considered the meaning of the words “due” or “due and payable”. Considering the judgment’s potentially far-reaching implications, this article will consider the history of some of the most important judgments in this regard, before  discussing these practical implications in the context of the VAT Act.

Legislative background

Section 28(1) of the VAT Act requires every vendor to submit a return of that vendor’s tax period by the twenty-fifth day of the month commencing after the end of that tax period or, in the case of returns filed electronically, by the last business day of the month. This return is a self-assessment by the vendor with a calculation under section 16 of the VAT Act of the tax due by the vendor or the refund due to the vendor for that particular tax period.

Sections 28(1)(b)(ii) and (iii) stipulate that payment of the tax due under the return, if the vendor makes payment by debit order or electronically, is due on the last business day of the month during which the return was due.  If the payment is made late the vendor will be liable for penalties under Chapter 15 of the Tax Administration Act 28 of 2011 (TA Act) read with section 39(7) of the VAT Act.

The self-assessment and payment of VAT may therefore appear relatively simple when considering the provisions of the VAT Act in isolation, but case law suggests that in practice it is not always this straight forward.

Traco Marketing (Pty) Ltd v Minister of Finance

In the judgment of Traco Marketing (Pty) Ltd and another v Minister of Finance and others [1996] 2 All SA 467 (SE) the High Court had to consider the application of section 40(2)(a) of the VAT Act (as it then was). It allowed the Commissioner to file with the clerk or registrar of any competent court a statement setting forth the amount so due and payable by a vendor. That statement would have the effect of a civil judgment taken against the vendor.

The Commissioner issued an assessment against the vendor and then on the same day filed a statement with the registrar for the tax due under this assessment. The vendor applied to the High Court for an order setting aside the statement and subsequent warrant of execution. In support of their application, the vendor argued that it could never have been the intention of the legislature that a judgment could be taken against a vendor based on an assessment that was still subject to objection and appeal and therefore neither final nor conclusive. The High Court disagreed and found that it was a feature of the VAT Act (specifically sections 7, 28 and 38 as they then read) that the tax becomes due and payable without any preceding action by the Commissioner. Furthermore, an assessment under section 31 was not required to create this obligation to pay tax and section 40(2)(a) provided a legitimate remedy for the recovery of the tax which has become due and payable prior to assessment.

The Metcash Trading Ltd case

A similar issue came before the Constitutional Court in Metcash Trading Ltd v Commissioner, South African Revenue Service and Another [2000] ZACC 21 which was required to assess the constitutionality of sections 36 and 40 of the VAT Act. The Commissioner raised additional assessments against Metcash after not being satisfied with the original returns submitted by the company. Metcash objected against these assessments and after the objection was disallowed by the Commissioner, Metcash was given 48 hours to make payment of the outstanding amounts in full, failing which the Commissioner would apply for a civil judgment under section 40 of the VAT Act. As a consequence thereof, Metcash made an urgent application to the High Court to stop the Commissioner from taking these collection steps.

The High Court declared certain provisions of section 36 and 40 of the VAT Act invalid resulting in the appeal to the Constitutional Court. In the unanimous judgment of Kriegler J, the Constitutional Court outlined the basic principles of VAT and found that VAT is a multi-stage tax which arises continuously and through a process of self-assessment and periodic reporting, whereby the vendor becomes an involuntary tax collector on behalf of the fiscus. VAT, unlike income tax, does not give rise to a liability only once an assessment has been made. Furthermore, it would be impractical to expect a vendor to pay the fiscus for each and every supply that it makes and the VAT Act provides a mechanism for the vendor to periodically calculate, account and pay VAT to the Commissioner.

In principle therefore, Kriegler J found that VAT is payable on each and every supply of goods or services and it is left to the vendor to ensure that the correct balance is calculated, appropriated and paid over to the Commissioner in respect of each tax period. Furthermore, requiring the vendor to pay on assessment prior to disputing their tax liability is an essential part of the VAT scheme and therefore the “pay now, argue later” rule applicable to a vendor who is aggrieved by an assessment does not infringe the vendor’s right to due adjudication or the limitation of that right is justified.

The implication of both the Traco and Metcash judgments is that VAT, unlike other taxes, is due by the vendor to SARS at the moment the relevant supply of goods or services takes place. It may be that the VAT Act allows the vendor to calculate and assess this liability at a later stage by the submission of the VAT return, but this does not detract from the fact that VAT is due prior to the submission of this self-assessment.

Wiese and Others v Commissioner for SARS

The SCA judgment in Christoffel Hendrik Wiese and Others v CSARS [2024] ZASCA 111 is a more recent judgment dealing with the issue of when a tax debt comes into existence. The Commissioner instituted action against the Appellants under section 183 of the TA Act for the payment of R216,6 million on the basis that the Appellants had caused or assisted in causing a taxpayer to dissipate its assets in order to obstruct the collection of a tax debt owing to SARS.

One of the issues raised by the Appellants on appeal was that the assessments for secondary tax on companies (STC) and capital gains tax (CGT) had been raised after the dissipation of the assets. The assessed tax debt, it was argued, was therefore not due and payable at the time that the dissipation of the assets occurred and hence section 183 of the TA Act could not find application.

In the unanimous decision of the SCA, Goosen JA considered the definition of “tax debt” as contained in section 169(1) of the TA Act which at the time of the dissipation of the assets was defined to mean “an amount of tax due by a person in terms of a tax Act”. The SCA found that tax is levied by operation of law and a taxpayer is chargeable to tax upon the occurrence of a taxable event and may therefore arise before the issuing of an assessment. Regarding the meaning of “tax debt” the court found as follows:

“In this sense a ‘tax debt’ is that amount of tax for which the taxpayer is chargeable to tax which is payable by a taxpayer to SARS. The determination of the amount of tax due to SARS occurs by way of assessment. An assessment however, does not establish or impose liability. The liability exists by operation of law whether or not there has been an assessment. The definition of terms ‘tax debt’ and ‘assessment’ bear this out. An ‘assessment’ means a ‘determination of the amount of tax liability or refund, by way of self-assessment by the taxpayer or assessment by SARS’. If the definition of ‘tax debt’ is substituted, then an ‘assessment’ means a ‘determination of a ‘tax debt’ which a taxpayer is obliged to pay to SARS. The tax debt exists, with or without an assessment. An assessment merely determines it and renders it recoverable in accordance with the recovery mechanisms provided by the TAA”[1].

Goosen JA also referred to the minority judgment in the Medtronic[2] matter where the SCA held that an assessment means a determination of the amount of a tax liability or refund by way of self-assessment by the taxpayer or assessment by SARS. Without such an assessment, the duty to pay the tax does not arise even though there is an underlying tax obligation. With reference to Medtronic, the court held as follows:

“In the context of that case, the minority judgment pointed out that the determination of the amount of tax (which includes interest deemed or assessed to be due and payable) permits enforcement of the obligation to pay… An indebtedness to SARS for payment of tax is not dependent upon an assessment to tax”[3].

We discussed the Medtronic judgment in a Tax Flash earlier this year.

Singh v Commissioner for SARS

The judgments described above are further complemented by the decision in Singh v Commissioner SARS [2003] ZASCA 31 where the SCA not only considered when a VAT debt is due but also when a VAT debt is payable.

The Appellant sought an order setting aside a judgment taken by the Commissioner under section 40(2)(a) of the VAT Act. The Appellant, in support of this order, submitted that he had not been provided with notice of the assessments prior to the filing of the statement under section 40(2)(a) of the VAT Act and that the judgment taken by the Commissioner was therefore void.

In the majority judgment of Cloete JA and Hefer AJA the court found that an amount is only due and payable under the VAT Act once the correctness of this amount has been ascertained. This determination of the amount due is either reflected in the vendor’s return, or if the vendor has failed to submit a return but has been assessed by SARS and failed to object to this assessment or if there is a dispute, after the procedures relating to objection and appeal have been exhausted. Stated differently, in the absence of a notice of assessment an amount which is due under the VAT Act cannot be payable. Furthermore, the primary purpose of the Commissioner giving notice of the assessment was not to provide the vendor with an opportunity to object or appeal but rather to render the VAT already due as payable.

In the circumstances the court found that an assessment either in the form of a self-assessment in a return by the vendor or a notice of assessment by SARS was a prerequisite to SARS being able to file a statement under section 40(2)(a) of the VAT Act.

Reading the Traco, Metcash, Wiese and Singh judgments above one can therefore draw the following conclusions:

• A VAT debt becomes due to SARS as soon as the vendor has made a supply of goods or services. Although the amount of VAT due may not yet have been quantified by assessment, this does not detract from the liability to SARS which is established by operation of law; and
• A VAT debt is only payable to SARS once an assessment has been made. In the absence of an assessment (either by the vendor or by SARS) the VAT due by operation of law cannot be collected by the Commissioner.

Henque v Commissioner for SARS

This brings us to the recent judgment of the SCA in Henque which applies the conclusions reached above in the context of business rescue proceedings.

The Appellant commenced business rescue proceedings on 31 January 2018. The business rescue practitioner submitted VAT returns for the period 06/2018 to 03/2019 which resulted in a refund due to the Appellant. However, during February 2019, the Commissioner informed the Appellant that the VAT credit would be set-off against an additional income tax assessment for 2017 and the VAT liability for the 01/2018 tax period.

The Appellant disputed the set-off and eventually applied to the High Court for an order that, specifically with regard to VAT, any liability for VAT under the VAT Act in respect of a supply that took place before the commencement of business rescue, is a liability which arose prior to the commencement of business rescue. Furthermore, such VAT liability is a pre-commencement claim under business rescue proceedings and therefore may not be set off against the VAT refunds due by the Commissioner which arose after the commencement of business rescue proceedings.

For the sake of context, section 154(2) of the Companies Act 71 of 2008 (Companies Act) provides that if a business rescue plan has been approved and implemented a creditor is not entitled to enforce any debt owed by the company immediately before the beginning of the business rescue process, except to the extent provided for in the business rescue plan. The implication of section 154(2) of the Companies Act for the purposes of the Henque matter was that if an income tax or VAT debt was owed by the Appellant prior to the commencement of business rescue proceedings then such debt would be unenforceable by the Commissioner except to extent that a portion thereof was provided for in the business rescue plan.

Specifically with regard to VAT, the SCA referred to the Metcash judgment and found that the liability for VAT arises and the tax is owed at the time of the relevant supply. The submission of a VAT return merely quantifies this liability but does not create the liability. Therefore the 01/2018 VAT liability was a pre-commencement debt which was owed prior to 31 January 2018. The submission of the VAT return on 18 March 2018 merely ensured that the 01/2018 VAT liability became liquid and mature.

The VAT owed by the Appellant in respect of goods or services supplied prior to the commencement of business rescue proceedings on 31 January 2018 was therefore pre-commencement debt and subject to the business rescue plan under section 154(2) of the Companies Act.

The VAT refunds due by virtue of the VAT returns submitted for tax periods after the commencement of business rescue proceedings were however regarded as post-commencement credits. These post-commencement credits could therefore not be set-off against the pre-commencement VAT debt due for the 01/2018 tax period.

The implications of the Henque judgment are significant, for example, if a company has outstanding VAT returns for tax periods prior to the commencement of business rescue proceedings and these returns are only submitted by the business rescue practitioner after the commencement of business rescue proceedings. By virtue of the Henque judgement the VAT debt due in terms of these returns would be owed by the vendor prior to the commencement of business rescue proceedings and cannot be recovered by the Commissioner except to the extent provided for in the business rescue plan.

The judgment also raises certain additional questions such as the following: What happens if input tax incurred by the vendor in VAT periods prior to the commencement of business rescue proceedings was only claimed under the proviso to section 16(3) of the VAT Act in a tax period after the commencement of business rescue proceedings? Also, would the Commissioner have been successful in attempting to apply set-off under section 133(1)(c) of the Companies Act which allows under certain circumstances for a claim against a company under business rescue to be set-off against any claim made by the company against that same creditor in legal proceedings?

Furthermore, the judgment does not deal with the so-called VAT clawback under section 22(3) of the VAT Act and the timing of this VAT debt being due before or after the commencement of business rescue proceedings.

Conclusion

The Henque judgment encapsulates previous case law on the various meanings of “VAT debt” and emphasises the importance of this distinction and the consequences that flow therefrom. A “VAT debt” can mean an amount of VAT that is due or owed to SARS notwithstanding the amount of the VAT debt has not yet been established by assessment. Alternatively, “VAT debt” can also mean a determined amount (by assessment) of VAT due to SARS which has become payable and which the Commissioner is permitted to recover.

A VAT vendor should be aware of the distinction between “due” and “due and payable” and the implications thereof when applying the VAT Act and TA Act.

[1] Paragraph 29

[2] Commissioner for the South African Revenue Service v Medtronic International Trading SARL [2023] ZASCA 20 at paragraph 67 and 69.

[3] Paragraph 33