Taking Sars to court is a risky business
The SA Revenue Service (Sars) recently announced that its preliminary total tax collections for the 2023/24 fiscal year were R1.741-trillion, with an unexpected surplus of R10bn. One of the main reasons for this betterthan-expected tax collection was attributed to its compliance efforts.
Sars has a litigation strategy that seeks to provide certainty and clarity for taxpayers through the courts on tax and customs laws and, when justifiable, to make noncompliance hard and costly. This strategy has been implemented over several years and is continually producing better results each fiscal year.
According to Sars, in this fiscal year, 110 judgments were handed down and it was successful in 94 cases an 84% litigation success rate. On the face of it, this means that Sars wins eight out of 10 times against taxpayers when a case is decided by a court. This high success rate has been the trend for the past few years.
This is something taxpayers must take into account when deciding whether to proceed against the taxman. Based on Sars’ success rate, taking the institution to court is risky for taxpayers in many respects.
In recent years, South Africa has become a very litigious country. However, the public is sometimes not aware of the litigation strategy of the parties involved, the amount of time spent on those cases, opportunities lost and the financial costs thereof.
For taxpayers to finally litigate, and their cases to be heard in the courts against Sars, it normally means that all the internal remedies available to a taxpayer have been exhausted. Practically, it means the dispute resolution process provided for in the Tax Administration Act of 2011 has been exhausted.
A taxpayer would have spent thousands of rand during the dispute resolution process and if the case is eventually heard by the Tax Court the judgment can be appealed in the high courts, whose judgments are appealable to the Supreme Court of Appeal (SCA).
In some cases, decisions of the SCA are taken on appeal to the Constitutional Court. The costs can run into millions of rand.
Years will be spent on the case without any certainty on how to apply the relevant tax laws, which would, in almost all cases, have resulted in lost business opportunities for most taxpayers.
However, what the 84% litigation success rate does not tell you is that the number of judgments handed down constitutes a very small number of disputed cases lodged against Sars by taxpayers. As was the case in the past, we hope that Sars will provide us with a full analysis of disputed tax cases in the annual report later in the year.
The annual report provides a useful analysis of the tax and customs disputes handled by the revenue service for taxpayers and their advisers. In its annual reports, Sars provides a breakdown per
fiscal year of the tax disputes handled and finalised within the internal review process, as part of the dispute resolution process.
For the 2022/23 fiscal year, Sars received 161,115 objections (the first step in a tax dispute process).
Just more than 21,900 of the objections were disallowed and only 10,285 were referred for litigation by taxpayers to the
Tax Board and tax court.
Of the 10,285 cases to be litigated, about 7,644 were finalised with Sars, or the taxpayer, conceding or withdrawing or settling the case.
This was similar in many respects for the fiscal year 2021/22. We expect a similar trend for the 2023/24 fiscal year.
Based on the above statistics on tax disputes, it is clear that the dispute resolution process plays a crucial part in resolving tax disputes.
Taxpayers should use this process and not rush to litigate in the courts against Sars, when, for now at least, this seems to favour the institution. Even when taxpayers succeed in the courts, they may have lost the war considering the time, money and opportunities lost and that Sars (and the National Treasury) may ultimately decide to amend the provisions in the tax legislation that were an issue in dispute.
Taxpayers must remember that they are underdogs when they are litigating tax cases.
There are eight out of 10 chances that Goliath, not David, will be the victor in any tax dispute that is ultimately decided by a court of law. In simple terms, counsel should probably advise taxpayers of a possible 20% chance of success when they are litigating against Sars.