Henque 3935 CC t/a PQ Clothing Outlet v Commissioner for the South African Revenue Service

Henque 3935 CC, a retailer trading as PQ Clothing Outlet, filed its 2017 income tax return claiming a loss. SARS issued an original assessment in November 2017 and later conducted an audit. Henque commenced business rescue on 31 January 2018. After business rescue commenced, SARS issued an additional income tax assessment for the 2017 year and Henque accumulated a VAT credit exceeding R1 million for subsequent VAT periods. SARS set off the VAT credit against the additional income tax assessment and a VAT liability, asserting these were post-commencement debts not subject to the business rescue plan. Henque sought declaratory relief in the High Court that the tax liabilities related to periods before business rescue and could not be set off against post-commencement VAT refunds. The High Court dismissed the application, holding the tax debts were post-commencement. Henque appealed to the Supreme Court of Appeal.

The appeal was upheld with costs. The High Court’s order was set aside and replaced with a declaration that income tax and VAT liabilities relating to periods ending on or before 31 January 2018 are pre-commencement claims and that pre-commencement claims may not be set off against SARS’s post-commencement liabilities to Henque during business rescue. SARS was ordered to pay the costs of the application, including the costs of two counsel.

The judgment clarifies the distinction between the creation of a tax liability and its quantification through assessment in the context of business rescue. It confirms that tax debts relating to periods before business rescue are pre-commencement claims even if assessed later, limiting SARS’s ability to bypass business rescue plans through set-off. The case also provides guidance on the scope of section 105 of the Tax Administration Act following the Constitutional Court’s decision in United Manganese.