Spur’s loss in tax case surprises legal fraternity

Restaurant group Spur has lost a long-running tax battle at the Supreme Court of Appeal in a judgment that has shocked senior lawyers, with Spur still seeking legal advice on whether it should approach the Constitutional Court.

Speaking in light of this judgment, multiple lawyers confirmed to Business Day that there is a “long-standing concern about the quality of tax judgments at the appeal courts”.

The case revolves around R48m paid into a trust by Spur in 2005 as part of a share scheme incentive for senior management. Spur and its tax advisers believed the trust payment was an expense and qualified for a tax deduction.

The SA Revenue Service (Sars), on finding out that Spur had not declared the existence of the trust in its tax returns, then said tax must be paid on the R48m. The case went to the Income Tax Court, which ruled that the R48m was a deductible expense. The Western Cape High Court also found in Spur’s favour, with a minority judgment finding against it.

Sars appealed the matter and won at the Supreme Court on

Friday. The court found that the R48m was not closely enough linked to Spur’s business operations and income-producing activities and thus did not qualify as a business expense.

The R13.9m in tax that Spur owed and the R8m penalty were paid in 2015 and 2016. It is common practice to settle tax bills upfront, even as legal disputes unfold in court.

Business Day confirmed with multiple tax lawyers who were not involved with the case that there is widespread debate about whether the appeal judges correctly applied SA’s technical tax rules to the case, with the judgment being described by some as “controversial”.

Spur had not expected to lose, saying in its most recent annual report: “The board, in consultation with its tax advisers, remains confident that the probability of Sars’ appeal being successful is low.”

Spur is expected to update the market on Monday.

One of the secondary arguments in the case was whether Sars could pursue the disputed amount years later, as the disputed payment was made in 2005 and Sars cannot claim new tax payments more than three years after a tax return is filed. But Spur had not declared the existence of this trust in its tax returns for five years between 2005 and 2009. The misstatements allow Sars to pursue the historical tax matter.

Spur argued that it was an administrative error and negligence that led to the false statements. The Supreme Court judgment disagreed and had harsh words for Spur, calling its tax returns “plainly false and a misrepresentation”. When Spur was asked about the existence of a trust, “it simply boggles the mind ... that Spur answered ‘no’ to the relevant question for each and every subsequent year from 2005 to 2009”.

Spur told Business Day that the company had disclosed to the court and Sars that the responses to certain questions in the tax return were “inadvertently entered incorrectly due to administrative errors”. The judgment found the misstatements could not by any “stretch of imagination be ascribed to any inadvertent error”.

However, Sars did not pursue fraud charges, suggesting this was not in any way a deliberate misrepresentation.

Spur said in a statement to Business Day that it had changed its tax administration team and improved its controls.

paid into a trust by Spur in 2005 as part of a share scheme incentive for senior management

tax years when Spur did not declare the existence of this trust in its tax returns