On 12 May 2025, the Supreme Court of Appeal (“SCA”) delivered a notable judgment clarifying the treatment of tax liabilities and Value Added Tax (“VAT”) refunds in the context of business rescue proceedings.
The judgment provides important guidance for companies, creditors, and practitioners navigating the intersection of tax law and business rescue under the Companies Act 71 of 2008 ("Companies Act).
Pre- or post-commencement tax debts
In this matter, SARS had assessed income tax liabilities during the year 2017 (prior to commencement of business rescue); however, in 2018 (during business rescue), SARS conducted additional assessments in regard to the tax liabilities that occurred in 2017. The SCA needed to determine if the additional assessments were pre- or post-commencement tax debts owed by the company.
In doing so, the SCA outlined a clear distinction between when a tax debt (whether income tax or VAT) is "owed" and when it becomes "due and payable."
It held that liability for income tax arises at the end of the relevant tax year, even if the amount is only quantified later (i.e. in the next year) through an assessment. Thus, income tax liabilities for periods ending before the commencement of business rescue are pre-commencement debts, regardless of when SARS issues an assessment.
Similarly, VAT liability arises at the time of the taxable supply, not when the VAT return is submitted or assessed. VAT debts relating to supplies made before the commencement of business rescue are also pre-commencement debts.
The SCA emphasised that the process of assessment or self-assessment merely quantifies the debt; it does not create a new liability, hence the additional assessment debt was deemed to be a pre-commencement debt.
Can set off apply?
In concluding that the additional assessment was a pre-commencement debt, the SCA needed to determine whether SARS could set off VAT refunds (arising after the commencement of business rescue) against the pre-commencement tax debts owing from the additional assessment.
In answering this question, the court observed that section 191 of the Tax Administration Act 28 of 2011 ("Tax Administration Act") allows SARS to set off refunds against outstanding tax debts, however, the Tax Administration Act also recognises that tax debt is irrecoverable at law if it is subject to a business rescue plan. On this basis alone, the set off could not occur.
Key takeaways
This SCA judgment provides much-needed certainty for companies in business rescue, their creditors, and business rescue practitioners and from this judgment, the following is clear:
- Tax debts for periods before business rescue are pre-commencement claims, even if assessed later.
- SARS cannot unilaterally set off VAT refunds arising after business rescue against pre-commencement tax debts.
- All pre-commencement claims, including those of SARS, must be addressed through the business rescue plan, and enforcement is subject to the statutory moratorium.
The decision underscores the importance of careful planning and communication with SARS and other creditors during business rescue and highlights the need for business rescue plans to clearly address the treatment of tax liabilities and potential refunds.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
