Tax incentive test case delays leave employers exposed

Employers disputing disallowed Employment Tax Incentive (ETI) claims continue to face significant delays and financial exposure. A test case intended to resolve the matter has yet to be heard on its merits, with interlocutory proceedings further postponing progress.

ETI disputes between the South African Revenue Service (Sars) and taxpayers have been mounting since July 2021.

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More than 400 employers have agreed to stay their disputes pending the outcome of the test case, leaving them subject to accumulating penalties and interest while the legal process remains unresolved.

The test case

‘Taxpayer TAT’ entered into limited duration contracts of employment with various employees for a period of 12 months. It ran a skills development initiative in partnership with a training institution, which formed the basis of its ETI claims.

The remuneration due to the employees under their contracts was paid directly to the training college to offset the employees’ tuition obligations.

According to the taxpayer, the agreement satisfied its remuneration obligations under the employment contract, thus qualifying it to claim ETI credits for tax deduction purposes.

Sars disallowed the ETI claims on the basis that the individuals did not “work” for Taxpayer TAT and were not remunerated by the company as required by the ETI Act.

The matter was designated a test case involving similar factual and legal issues arising in disputes between Sars and 408 other taxpayers.

Joon Chong, tax partner at Webber Wentzel, says the test case was initially set down for May 2024 but did not proceed due to delays by Sars. The rescheduled April 2025 hearing dates were used for an interlocutory application rather than the merits.

In the interlocutory application, Sars attempted to amend its grounds for assessment stating it wanted to raise additional legal points. However, the tax court found the amendment introduced “a materially new dimension” to the case.

Sars’s ‘new case’

The judge found that Taxpayer TAT’s contention that this was a novation was not without merit.

It dismissed the application with costs in October last year.

The court found the amendment sought by Sars, though framed as a refinement of its legal case, in effect introduced a materially new case, with:

• Reliance on new statutory provisions;
• A different interpretive approach to “work” and “remuneration”; and
• A shift in the factual matrix relevant to the ETI claims.

The court noted that the other 408 taxpayers agreed to be bound by the outcome based on the originally pleaded case. They have not been given notice of the new issues and statutory provisions raised in the amendment.

“It would be fundamentally unfair; not in the interest of the administration of justice and potentially unconstitutional to bind those taxpayers to an outcome based on grounds they were not afforded an opportunity to address,” the judge found.

The ETI is aimed at encouraging employers to hire young work seekers.

It was implemented with effect from 1 January 2014, with the objective of reducing employers’ cost of hiring young people through a cost-sharing mechanism with government.

It is supposed to allow the eligible employer to reduce their Pay-As-You-Earn (PAYE) while leaving the wage received by the employee unaffected.

Further delays

Chong notes that if the October interlocutory judgment is appealed, further delays will follow.

The hearing on the merits can only occur after the interlocutory dispute is finalised and the process for the hearing on the merits can begin.

“This means that a hearing on the merits could only occur perhaps in 2027 if Sars appeals. This would then be six years after the first additional assessments on the alleged schemes were issued by Sars around July 2021.”

She also notes that interest accrues from the effective date until the tax debt is fully paid.

Employers in stayed disputes continue to accrue interest liability, even though Sars caused the delays.

The Tax Administration Act limits Sars’s discretion to remit interest to circumstances involving disaster, civil disturbance, serious illness, or matters beyond the taxpayer’s control. “Whether Sars’s delays or systemic backlogs qualify as circumstances beyond the taxpayer’s control remains untested,” Chong adds.

Financial exposure

Many employers now face mounting tax debts comprising disallowed ETI claims, 10% penalties, and years of accumulated interest. Some face exposures threatening the going concern status of their businesses.

There are employers who participated in these schemes in good faith, often to support broad-based black economic empowerment (B-BBEE) purposes and to contribute to policy initiatives to reduce youth unemployment, remarks Chong.

The pending test case also means that Sars’s position for settlement is very limited, leaving employers unable to finalise or progress their disputes independently.

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