Certainly uncertain: SCA ruling leaves unanswered questions about VAT clawbacks

Image source: Drazen Zigic from Freepik

While the judgment offers useful confirmation of when a tax liability arises (particularly under the time of supply and income tax period rules), its broader impact is far less clear-cut. The ruling on set-off may have unintended consequences, and the judgment stops short of resolving key uncertainties, such as whether the adoption of a business rescue plan constitutes a compromise that could trigger a VAT clawback.

Despite the initial relief expressed by many practitioners, Henque ultimately leaves important aspects of the interaction between tax and business rescue law unresolved.

When does a tax debt arise?

The central question was whether a tax liability arises at the time of the ‘tax event’, or only once Sars issues an assessment. The SCA held that a tax liability arises when the taxing event occurs, which in turn is determined by tax legislation.

The SCA relied on its judgment in Christoffel Hendrik Wiese and Others v CSars 2025 (1) SA 127 (SCA) (Wiese) where the Court found that a ‘tax debt’ may come into existence prior to the issuing of an assessment, provided the relevant ‘tax event’ has occurred.

However, in Henque, the SCA found that in the case of income tax, the liability arises at the end of the tax period (when the taxpayer’s tax liability for the period is effectively finalised in terms of section 5 of the Income Tax Act), and in the case of VAT, at the time of supply, as determined by the time of supply provisions (section 9) read with section 7 of the VAT Act.

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The SCA concluded that the subsequent tax assessment (whether issued by Sars or by way of self-assessment) does not create the liability; it merely quantifies an existing liability and creates a further obligation to pay the relevant amount of tax to Sars.

Because Henque’s 2017 year of assessment concluded before business rescue commenced, the 2017 income tax liability was a pre-commencement debt. Crucially, the SCA held that the issuing of an additional assessment in May 2018 merely served to adjust the liability created by operation of law at the end of Henque’s 2017 tax period, and did not create any new tax liability.

The same reasoning applied to the VAT liability for January 2018 - the relevant supplies were made (and received) before the commencement of business rescue, and so the determination of Henque’s VAT liability for the 01/2018 period was a pre-commencement liability.

Enforcing pre-commencement debts indirectly by set-off

Section 154(2) of the Companies Act 71 of 2008 (the Companies Act) provides that once a company enters business rescue, creditors may only enforce pre-commencement claims in accordance with the adopted business rescue plan. Sars, the Court emphasised, is not exempt from this rule.

Critically, the SCA found that section 191 of the Tax Administration Act 28 of 2011, which provides for automatic set-off of tax refunds against outstanding tax debts, is overridden by section 133(1)(c) of the Companies Act, which prohibits enforcement action during business rescue proceedings.

By applying set-off against refunds that accrued post-commencement, the Court was of the view that Sars was effectively enforcing pre-commencement debts outside of the business rescue process. The SCA held that this was impermissible, as Sars cannot do indirectly what it is barred from doing directly.

This is where the judgment becomes more difficult when considering its treatment of set-off.

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Set-off and section 133(1)(c): A problematic interpretation

Section 133(1)(c) prohibits enforcement in a forum and has traditionally been interpreted as applying to litigation or legal process, not automatic legal effects like set-off, which occurs extrajudicially by operation of law where mutual debts exist.

In any event, set-off is expressly included as an exclusion in terms of section 133(1)(c). The SCA’s view seems to ignore the distinction between enforcement by legal process and legal consequences arising by operation of law.

In practice, creditors and debtors in business rescue often continue trading, and mutual debts naturally arise. If the Court’s ruling is taken to mean that any set-off during business rescue is impermissible, this could discourage ongoing commercial engagement with companies under rescue.

This issue is further complicated by the judgment's failure to specify whether the prohibition applies pre- or post-adoption of a plan.

Set-off before a plan is adopted may still be permissible, especially if both debts are due, liquidated and reciprocal. Once a plan is adopted, and claims are compromised, set-off may no longer meet the legal criteria. But the judgment does not clearly draw this line.

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Clarity at first glance — confusion on closer reading

The prevailing sentiment in the market appears to be one of relief that clarity has finally been achieved. But this perception does not hold up to scrutiny.

While the Court has, to some extent, reaffirmed what was already established in Wiese, namely, that tax debts arise at the time of the underlying tax event, Wiese itself is not settled law, as it is currently before the Constitutional Court on appeal.

At the same time, the Henque judgment introduces new uncertainty regarding the permissibility of set-off and the interpretation of the statutory moratorium.

In our view, the Court's analysis leaves two core questions unanswered:

• Is set-off impermissible even if it does not occur in a legal forum? If so, this would mark a significant shift in the jurisprudence and one that the text of section 133(1)(c) does not support, especially given that set-off is expressly included as an exclusion under that section.

• Does the judgment apply before or after the adoption of a plan? The judgment remains silent on this issue. This leaves practitioners in the dark as to whether Sars or any other creditor may lawfully raise set-off before a compromise has been adopted, even where the legal requirements for set-off are otherwise met.

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The VAT clawback issue remains unresolved

Despite expectations, the judgment also does not seem to provide any clarity on the VAT clawback issue under section 22(3) of the VAT Act.

Practitioners had hoped the Court would address whether the adoption of a business rescue plan (which typically involves a compromise of debt) triggers a VAT clawback where input tax was previously claimed. Sars has consistently maintained the position that any clawback arising after the adoption of a plan constitutes a post-commencement liability, which would put them in a favourable position in business rescue proceedings.

While the Court clarified that VAT liabilities arise in line with the time of supply rules, it did not engage with the specific question of when a clawback under section 22(3) is triggered in the context of business rescue. The interaction between VAT clawbacks and the protective framework of business rescue remains underdeveloped.

Instead, the SCA seemingly only confirmed that, as decided in Wiese (which is currently before the Constitutional Court), an assessment does not give rise to a tax liability. Henque does not develop the law in this regard, and as a result, the core uncertainty around VAT clawbacks remains unresolved.

Conclusion

While Henque provides helpful confirmation regarding the timing of tax liabilities, it fails to address the more pressing commercial issues arising from ongoing trade during business rescue, particularly the circumstances in which set-off may still be applied.

In the end, Henque does not provide the clarity so many had hoped for. Rather than settling the law, it leaves critical questions unanswered and introduces new areas of uncertainty.