Instead of panicking and paying, companies finding themselves at the sharp end of a SARS diesel rebate audit should seek advice to correctly interpret and apply the terms of the legislation that governs the rebate scheme, says Cliff Watson, associate director of tax, Grant Thornton Johannesburg.
“Too many companies are falling foul of SARS’s current approach of issuing letters of intent in which either the company’s eligibility to claim the rebate is contested, the amounts claimed disputed, or the documentary veracity of their application rejected,” says Watson.
Companies are generally threatened with penalties of up to 200% being levied on understated VAT amounts, forfeiture of an amount equal to the value of the litres overstated, or suspension from the scheme. “Yet considering judgements issued in relevant South African case law these settlements are often not in line with the correct application of legislation,” says Watson.
In a nutshell, Schedule 6 of the Customs and Excise Act, No 91 of 1964 (Customs Act) allows VAT registered companies, operating in specific industry categories, to claim a diesel rebate on eligible diesel purchases. Since the legislation is quite specific regarding which companies and what activities using diesel qualify for the rebate, “companies should ensure that they meet the criteria for qualification before they apply for a diesel rebate,” says Watson.
Qualifying companies and activities, for example, include:
· On-land mining
· Coastwise shipping
· Offshore mining
· National Sea Rescue Institute
· Rail freight
· Electricity generation
Importantly, certain activities relating to these industries, for example diesel used in the rehabilitation of mines – either during operations or when operations have ceased – do not classify as eligible diesel purchases. Another example of non-eligible purchases is diesel used by a farmer in activities to change the nature of farm produce, such as the processing of grapes into wine or the drying of fruit.
Once certain that the activities for which the rebate is being requested definitely qualify for rebate, certain documentary requirements apply to how the consumption and cost of the diesel should be recorded – and then applied to SARS for rebate.
While this seems all straight forward enough, problems arise when companies making claims under the diesel rebate scheme are accused of wrongdoing – with penalties of up to seven times more than the original rebate amounts claimed by SARS in compensation.
For example, all claims need to be supported by ‘books, account or documents’ recording vehicle details, vehicle use, and dates, times and quantities of diesel used. Just because all these details are not included in a single log book does not mean a company is in breach. All companies will have records of their vehicles, their diesel consumption, the cost of this consumption, and a host of other records that can prove where the vehicles were and what they were used for. If all these different documents and records can be assembled to meet the requirements of the legislation then the company is not in breach and can confidently dispute the claims of the audit.
Instead, “too often companies elect to prematurely settle with SARS, even when their claim was both legitimate and correct – simply because they haven’t understood how to interpret the legislation and assemble the required documentation,” says Watson.
The trick is simply to identify, seek, find and correctly assemble all the information required.
Watson agrees that all companies should work within the spirit of the law to meet their tax obligations accurately and honestly in the interests of the country. When, however, it comes to disputes with SARS, especially in the arena of the current diesel rebate system, “companies that stand their ground and apply the letter of the law often find that many of SARS audit claims are incorrect or groundless and, with a little extra effort and evidence, they can more than satisfy SARS’s rebate qualification requirements,” concludes Watson.