Value-added Tax
1790. Personal liability of directors and shareholders
November 2009 - Issue 123

 

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Being appointed to the board of directors of a company is an honour and an opportunity which does not come without its accompanying responsibilities: this is something of which every director, or future director, has long been aware.

 

However, the true extent of directors’ and shareholders’ duties and their liability in the event of a company failing to comply with its obligations is often not truly appreciated, especially when it comes to a director’s or shareholder’s personal liability for the debts of the company, in particular a company’s tax obligations.

 

In terms of both the Income Tax Act and the VAT Act, all juristic persons are required to appoint a representative taxpayer who accepts responsibility for ensuring that the company meets its tax obligations. While it is true that both Acts afford certain protection to these representative taxpayers, this protection in fact provides little comfort when one has regard to the rather onerous provisions of section 48(9) of the VAT Act and section 16(2C) of the Fourth Schedule to the Income Tax Act.

 

Section 48(9) of the VAT Act states that "where a vendor is a company, every member, shareholder or director who controls or is regularly involved in the management of the company’s overall financial affairs shall be personally liable for the tax, additional tax, penalty or interest for which the company is liable". This provision is mirrored in section 16(2C) of the Fourth Schedule to the Income Tax Act, except in the context of employee’s tax.

 

While it is true that liability is limited to those directors, shareholders and members who are so involved in the financial affairs of the company that they may be said to have "control", or are "regularly involved in", the overall financial affairs of the company, there is neither a test of what constitutes control nor any formula for making such a determination. The issue is rather, according to commentary provided on this section, a factual one that should be determined on a case-to-case basis. However, as yet no court has had the opportunity to consider these provisions; leaving one with little certainty as to how these elements will be interpreted.

 

Although these provisions appear somewhat academic as long as the company is meeting its tax obligations, one merely has to refer to any recent High Court roll to see that there are many companies that are, in the current economic environment, suffering under extreme financial strain. As more and more companies find themselves unable to meet their tax obligations and with SARS’ current tendency to invoke its "pay now and argue later" powers, directors and shareholders are well advised to acquaint themselves with these provisions.

 

In addition, these provisions highlight the importance of all directors being fully acquainted with the provisions of the Income Tax Act and the VAT Act in particular in order to ensure that their companies comply with their obligations thereunder - an issue which has in fact again been highlighted in the new Report on Corporate Governance (King III). Chapter 7 of King III places a clear and unequivocal duty on all directors to not only identify all laws and regulations that are applicable to the company but also to sufficiently familiarise themselves with the content and the effect thereof so as to ensure that the company in fact complies with all such applicable laws, regulations, rules and standards. The laws referred to are not limited to the Income Tax and VAT Acts, but include all other taxing provisions (customs and excise, STT, transfer duty) as well as those covering environmental issues, anti-corruption, etc.

 

King III aside, the provisions that effectively grant SARS the power to brush aside the separate legal existence of the company and look to its shareholders and directors in their personal capacity for the satisfaction of debts of the company, provide an even greater incentive to ensure that effective compliance frameworks and processes are implemented and maintained by the board of directors who shall thus proactively ensure proper compliance by the company with its tax obligations. By properly fulfilling this duty, directors will hopefully eliminate the possibility of, or the need for, SARS to look to the directors and shareholders in their personal capacity for any outstanding VAT or employees’ tax owed by the company, putting at rest at least a few anxious directors’ and shareholders’ minds.

 

Cliffe Dekker Hofmeyr

 

IT Act:4th Schedule section 16(2C)

VAT Act:S 48(9)

The Report for Corporate Governance for South Africa and the Code of Governance Principles (King III): Chapter 17