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

Henque 3935 CC (Henque) traded as a retailer of apparel and beauty products through 40 branded stores in South Africa. For its 2017 financial year ending 28 February 2017, it filed a tax return claiming a loss of R46,000 and no income tax liability. On 29 November 2017, SARS issued an original assessment based on Henque's return and notified it of an impending audit. On 31 January 2018, Henque commenced business rescue proceedings under the Companies Act 71 of 2008, and a business rescue practitioner was appointed. SARS was notified of the business rescue commencement. On 1 May 2018, SARS raised an additional assessment for the 2017 income tax year. The business rescue plan was published on 31 May 2018 and sent to all known creditors, including SARS. On 2 August 2018, SARS lodged a claim with the business rescue practitioner, recording the 2017 additional assessment as a pre-business rescue debt. The business rescue practitioner submitted VAT returns for periods 06/2018 to 03/2019, accumulating a VAT credit of R1,018,320.80 which SARS initially approved but later revoked. On 14 February 2019, SARS informed the business rescue practitioner that it had set off the VAT credit against the 2017 additional income tax assessment debt and the VAT liability for period 01/2018, asserting these were post-business rescue debts not subject to the business rescue plan. After unsuccessful attempts to resolve the dispute, Henque issued a statutory notice under section 11(4) of the Tax Administration Act (TAA) and on 3 November 2020 brought an application in the Gauteng High Court for declaratory relief.

• Whether the high court had jurisdiction to entertain an application for declaratory relief concerning tax liability of a company in business rescue without first obtaining a direction under section 105 of the Tax Administration Act 28 of 2011
• Whether income tax liability arising from a 2017 additional assessment raised by SARS after commencement of business rescue is a pre-commencement or post-commencement debt
• Whether VAT liability for the period 01/2018 (ending 31 January 2018, the date business rescue commenced) is a pre-commencement or post-commencement debt
• Whether SARS is entitled to set off VAT refunds that became due to Henque after commencement of business rescue against tax liabilities that were pre-commencement debts

1. The appeal is upheld with costs including the costs of two counsel. 2. The order of the high court is set aside and substituted with the following order: It is declared that: (a) any liability for income tax in terms of the Income Tax Act 58 of 1962, in respect of a period of assessment which ended on or before 31 January 2018, being the commencement date of business rescue, is a liability which was owed by the applicant prior to the commencement of business rescue and is accordingly a pre-commencement claim; (b) any liability for VAT in terms of the Value Added Tax Act 89 of 1991 in respect of a supply of services or goods, that took place on or before 31 January 2018 being the commencement date of business rescue, is a liability which was owed by the applicant prior to the commencement of business rescue and is accordingly a pre-commencement claim; (c) any claims that arose prior to commencement of business rescue proceedings are not capable of being set off against the liabilities of the respondent to the applicant during the existence of the business rescue plan or until business rescue proceedings have ended or until substantial implementation of the business rescue plan. (d) the respondent is ordered to pay the costs of the application such costs to include the costs of two counsel.

1. The high court has jurisdiction to entertain an application for declaratory relief concerning the characterization of tax liability for business rescue purposes without obtaining a section 105 direction under the Tax Administration Act. Section 105 only applies where a taxpayer disputes an assessment or decision appealable to the tax court. A dispute about whether a tax liability is a pre- or post-commencement debt for business rescue purposes does not challenge the correctness of an assessment and does not fall within the scope of section 105. 2. Tax liability must be distinguished from when it becomes liquid and payable. For determining whether a debt is a pre- or post-commencement debt in business rescue, the relevant question is when the debt was owed, not when it became due and payable (applying Eravin Construction CC v Bekker NO). 3. Under section 5 of the Income Tax Act, liability for income tax arises at the end of the year of assessment in respect of income received or accrued during that year. The debt is owed immediately after the end of the year, even though it has not yet been quantified and is not yet due and payable. Assessment merely quantifies the pre-existing liability. 4. An additional assessment re-quantifies and correctly states the debt that was owed at the end of the relevant financial year. It does not create a new liability. Therefore, an additional assessment raised after commencement of business rescue, in respect of a year of assessment that ended before commencement, relates to a pre-commencement debt. 5. Under section 7 of the Value Added Tax Act, VAT liability arises at the time of the relevant supply, not when a VAT return is submitted. The return (self-assessment) quantifies the liability but does not create it. VAT supplies made on or before the date of commencement of business rescue give rise to pre-commencement claims. 6. Section 154(2) of the Companies Act provides that once a business rescue plan has been approved and implemented, a creditor is not entitled to enforce any debt owed by the company immediately before the beginning of the business rescue process, except to the extent provided for in the business rescue plan. This provision is binding on all creditors including SARS. 7. Section 191 of the Tax Administration Act entitles SARS to set off outstanding tax debt against refunds owed to a taxpayer, but this provision can only apply if the requirements for set-off are met. Tax debts subject to a business rescue plan are excluded from the operation of section 191 set-off. SARS cannot apply set-off for a pre-business rescue debt against a post-business rescue refund, as this would circumvent the legislative scheme regulating business rescue in the Companies Act. 8. Common law set-off also does not apply in these circumstances because one of the requirements for set-off - that the reciprocal debts must be due and enforceable - is not met. Pre-business rescue tax debts are, by operation of section 154(2) of the Companies Act, only enforceable to the extent provided in the business rescue plan.

The Court noted that after the appeal was heard, the Constitutional Court delivered judgment in United Manganese of Kalahari (Pty) Ltd v Commissioner for SARS [2025] ZACC 2, which extensively considered section 105 of the Tax Administration Act and how it has been interpreted by the courts. The Constitutional Court held that the high court cannot, in matters falling within the scope of section 105, exercise declaratory jurisdiction unless and until it has given a section 105 direction. The Supreme Court of Appeal called for supplementary heads of argument on this point and fully considered the implications of the United Manganese judgment. The Court observed that the dispute between the parties related to the characterization of tax liability for business rescue purposes under section 154 of the Companies Act and whether such liability could be set off against VAT refunds - not to the correctness of any assessment. The Court emphasized that the declaratory relief sought would not have any effect on any of the assessments SARS had issued, but would merely direct how amounts owing should be paid. This observation underscores the distinction between disputes about assessments (which fall under section 105 and the tax court's jurisdiction) and disputes about the legal consequences or characterization of tax liabilities in other legal contexts such as business rescue (which may be determined by the high court in its ordinary jurisdiction).

This judgment is significant for clarifying the interaction between tax law and business rescue proceedings in South African law. It establishes important principles about: (1) The scope of section 105 of the Tax Administration Act - the high court has jurisdiction to consider disputes about the characterization of tax liabilities for business rescue purposes without requiring a section 105 direction, as such disputes do not challenge the correctness of assessments but concern their treatment under the Companies Act. (2) The timing of when tax debts arise versus when they become liquid and payable - a crucial distinction for determining whether debts are pre- or post-commencement in business rescue. (3) Income tax liability arises at the end of the year of assessment under section 5 of the Income Tax Act, not when the assessment is raised. An additional assessment merely re-quantifies an existing debt; it does not create a new liability. (4) VAT liability arises when supplies are made under section 7 of the VAT Act, not when returns are submitted. The return is merely a quantification mechanism. (5) The moratorium under section 133 of the Companies Act on legal proceedings during business rescue extends to preventing set-off of pre-commencement debts against post-commencement refunds, protecting the business rescue plan's integrity. This judgment provides important guidance on protecting companies in business rescue from enforcement action by SARS and clarifies the proper characterization of tax liabilities for business rescue purposes, ensuring that tax authorities cannot circumvent business rescue protections through administrative mechanisms like additional assessments or set-off.