Henque 3935 CC t/a PQ Clothing Outlet v Commissioner for the South African Revenue Service (846/2023) [2025] ZASCA 56 (12 May 2025)

Case Note

Henque 3935 CC t/a PQ Clothing Outlet v Commissioner for the South African Revenue Service
Citation: [2025] ZASCA 56 (12 May 2025)
Case No: 846/2023

Reportability

This case is reportable due to its implications for the interpretation of tax liabilities in the context of business rescue proceedings. It addresses the critical distinction between pre-commencement and post-commencement debts, particularly regarding tax obligations that arise during the business rescue process. The decision clarifies how such liabilities interact with VAT credits, which is significant for businesses undergoing similar financial distress.

Cases Cited

• United Manganese of Kalahari (Pty) Ltd v Commissioner for SARS [2025] ZACC 2

Legislation Cited

• Income Tax Act 58 of 1962
• Value Added Tax Act 89 of 1991
• Tax Administration Act 28 of 2011
• Companies Act 71 of 2008

Rules of Court Cited

• None specified in the judgment.

HEADNOTE

Summary

The Supreme Court of Appeal addressed whether tax liabilities arising from an additional assessment by the South African Revenue Service (SARS) after a company entered business rescue should be classified as pre- or post-commencement debts. The court also examined whether these liabilities could be set off against VAT credits due to the company during the business rescue period.

Key Issues

The key legal issues included the classification of tax debts as pre- or post-commencement liabilities and the applicability of set-off provisions regarding VAT credits during business rescue proceedings.

Held

The court held that the income tax and VAT liabilities in question were pre-commencement debts and could not be set off against the VAT credits due to the company during the business rescue process. The appeal was upheld, and the previous ruling was set aside.

THE FACTS

Henque 3935 CC, trading as PQ Clothing Outlet, was a retailer operating multiple stores in South Africa. The company filed a tax return for the 2017 financial year, claiming a loss and thus no tax liability. Following an audit, SARS issued an additional assessment for the 2017 tax year after Henque commenced business rescue on January 31, 2018. The business rescue practitioner informed SARS of this status, and a business rescue plan was subsequently developed. Disputes arose when SARS attempted to set off a VAT credit against the additional tax assessment, leading Henque to seek declaratory relief from the High Court.

THE ISSUES

The court needed to determine whether the additional tax assessment issued by SARS constituted a pre-commencement or post-commencement debt and whether it could be set off against the VAT credit that Henque was entitled to during its business rescue.

ANALYSIS

The court analyzed the timing of the tax assessment and the nature of the debts in question. It referenced the provisions of the Income Tax Act and the Tax Administration Act, particularly focusing on the due dates of the assessments. The court concluded that the additional assessment was a pre-commencement debt because it arose from obligations incurred before the business rescue commenced. The court also considered the implications of the recent Constitutional Court ruling in United Manganese, which clarified the jurisdictional limits of the High Court in tax matters.

REMEDY

The court ordered that the appeal be upheld, declaring that the tax liabilities in question were pre-commencement debts. It also ruled that these debts could not be set off against the VAT credits due to Henque during the business rescue process. The court awarded costs to Henque, including the costs of two counsel.

LEGAL PRINCIPLES

The judgment established that tax liabilities arising from assessments made prior to the commencement of business rescue are classified as pre-commencement debts. Furthermore, such debts cannot be set off against VAT credits that arise during the business rescue period, thereby protecting the financial interests of the company undergoing rescue. This case reinforces the legal framework surrounding business rescue and tax obligations, providing clarity for future cases.