I only recently had the opportunity to read a judgment of the High Court in a case where SARS sought to impose VAT and SDL on recovery of salaries of apparent employees of a taxpayer from the taxpayer’s clients.[1]
The facts are briefly that the taxpayer entered into agreements with clients in terms of which the taxpayer would perform certain labour and payroll functions for their clients. SARS said the individuals in respect of which taxpayer administered the payroll were employees of the taxpayer. This conclusion resulted in SDL and VAT assessments being raised by SARS.[2]
It turned out, however, that SARS was wrong and that, in truth, the taxpayer was not the employer. Rather, it was the taxpayer’s clients that were the employers.
What struck me about this case is not the fact that SARS was wrong. Rather, it was testimony of the SARS officials in the tax court, the courts’ evaluation of that testimony of the SARS officials and lastly, what the arguments for SARS in their appeal suggests.
The testimony:
As far as can be discerned from the judgment in question, the SARS SDL auditors, Mrs Gafsa Obaray and her colleague, Nobathlo Mbongeni, seemed to have based their conclusion as to the relationship between the taxpayer and the individuals in question exclusively on:
- Statements made about the relationship in question during an interview with people from the taxpayer, who the auditors ought to have known was not the public officer for the taxpayer;
- The fact that the individuals in question were on the payroll of the taxpayer and PAYE was withheld on the individuals’ in question on the taxpayer’s PAYE number; and
- The fact that the tripartite agreement reflected the taxpayer as the employer.
Anybody with a basic understanding of labour law will know that this is quite the leap. Indeed, during cross examination, Mrs Obaray of SARS admitted that she does not know about the dominant impression test, nor did she apply it to the facts in question. It should, I think, be highlighted that Mrs Obaray has been an auditor at SARS for 30 years according to the judgment.
Mrs Obaray was found by the court a quo to be obstructive and evasive in her testimony.
The VAT audit manager for SARS appears to have effectively admitted under cross-examination that he is aware that, in reality, the taxpayer was not the employer, yet raised or approved the assessments on the basis that the taxpayer is the employer regardless.[3]
To me, the approach adopted by the auditors seem to be a very single-minded type of approach where either no or limited regard is had to the actual facts and circumstances. Almost like blindly following a standard operating procedure and not being willing to look past a single point of view. Indeed the tax court held, in relation to the testimony of the SDL auditor, that she “doggedly stuck her view” and was “not prepared to make reasonable concessions” and was “defensive under cross examination”.[4]
In my experience, this sort of behaviour is not isolated. Often, sweeping statements are made/bold conclusions are drawn from very limited facts. I think that “doggedly sticking to a view” is quite descriptive of many (but not all) interactions with SARS in my experience.[5]
SARS’ appeal
One of the grounds on which SARS appealed the judgment of the tax court was that the evidence led in support of the taxpayer’s case in the tax court was inadmissible because of the parol evidence rule.[6]
As the High Court held, the reason for this argument was obvious: the taxpayer’s evidence was not contested under cross-examination nor was it contradicted by SARS’ witnesses.
As elucidating as the court’s analysis of the of the parol evidence rule is, I cannot help but wonder: why was the taxpayer’s evidence not contested under cross examination in the trial court? Did the legal team try but fail? Or was the taxpayer’s evidence perhaps left uncontested on purpose? In the latter case, the basis for such decision can arguably only be informed by the belief that the taxpayer has not even remotely made out its case on the evidence led. Such decision suggests (to me at least) either arrogance or ignorance given the testimony of the taxpayer’s witnesses (and indeed SARS’ witnesses) clearly indicated the employment relationship was not with the taxpayer.
Conclusion
The first thing that came to mind after I read this judgment was Einstein’s wise words: “blind belief in authority is the greatest enemy of the truth”. I certainly also sometimes get the impression that some SARS officials allow the authority to get to their head and indeed it is, as it appears to have been in this case, an enemy of the truth.
Fortunately, though, ignorance and arrogance does not make their assessments stick. What it does do is it makes the fight to get the truth harder and longer. But with tenacity, perseverance and the right tax dispute resolution team, taxpayers will ultimately be able to reveal the truth and keep SARS’ authority in check.
[1] CSARS v HR Focus (CA 118/2024).
[2] The taxpayer had already accounted for the PAYE and UIF as this was one of the services it offered to its clients.
[3] Because under cross-examination, he admitted to most of the factors indicative of an employer-employee relationship, the dominant impression test indicated that the employer/employee relationship existed between the taxpayer’s clients and the individuals and not between the taxpayer and the individuals.
[4] Par 56 of the High Court Judgment
[5] This makes me think of the words of Aristotle: “It is the mark of an educated mind to be able to entertain a thought without accepting it.” I think this is a marker one will struggle to find in many.
[6] In short, the tripartite agreements reflected the taxpayer as employer and the SARS was seemingly trying to argue that the testimony of the taxpayer’s witnesses’ amount to extrinsic evidence aimed and contradicting the agreement and was therefore inadmissible (nice try but better luck next time).
