Henque 3935 CC v Commissioner for the South African Revenue Services (846/2023) [2025] ZASCA 56 (12 May 2025)
This matter concerned an appeal by Henque 3935 CC trading as PQ Clothing Outlet (“Henque”) in business rescue against the judgment of the Gauteng Division of the High Court, Johannesburg (“the High Court”), dismissing Henque’s application for declaratory relief. The declarator Henque sought was whether certain tax liabilities, (both income tax and value added tax (VAT)) which arose before business rescue were pre- or post-commencement debts for the purposes of Business Rescue under the Companies Act 71 of 2008.
Henque entered Business Rescue on 31 January 2018.
Henque, through its business rescue practitioner, argued that the liability for income tax for the 2017 year of assessment and VAT due for the January 2018 vat period arose prior to commencement of business rescue, are pre-business rescue liabilities and subject to the provisions of the business rescue plan.
SARS’ view was that the liability for income tax arose when SARS raised an additional income tax assessment for the 2017 year of assessment on 31 May 2018 and on submission of the VAT return for the January 2018 vat period. As both the additional income tax assessment and vat return were issued after commencement of business rescue SARS argued that both constituted post business rescue obligations. SARS sought to set off the resulting debt against VAT refunds due to Henque after the commencement of Business Rescue.
Henque contended that set off could not be applied as these tax obligations constituted pre-commencement debts, which were subject to the Business Rescue Plan.
The High Court, per Vally J, found that the 2017 income tax debt arose only upon the issuance of the additional assessment, which occurred after the commencement of Business Rescue. Consequently, it held that this tax liability was a post-commencement debt. The High Court also found that the VAT liability for the period ending 31 January 2018, being self-assessed after the commencement of Business Rescue, similarly constituted a post-commencement debt. On this basis, the High Court concluded that SARS was entitled to set off the VAT refund against these liabilities.
On appeal, the Supreme Court of Appeal (“SCA”) overturned this decision, drawing a critical distinction between the creation and quantification of tax liabilities. The SCA found that:
Income Tax Liability: The obligation to pay income tax arises at the end of the tax year during which taxable income is earned or accrued, as opposed to when an assessment is issued. The original assessment and any additional assessments merely quantify an existing obligation; it does not create a new debt. Accordingly, the 2017 tax liability arose at the end of the 2017 Income tax year which was before the commencement of Business Rescue and is therefore a pre-commencement debt.
VAT Liability: The SCA similarly held that the obligation to account for VAT arises at the time of supply, not upon the submission of a VAT return. Given that the 01/2018 VAT period ended on the very day Business Rescue commenced, the VAT liability in respect of each and every supply made during January 2018 constituted a pre-commencement debt.
Prohibition on Set-Off: The SCA further held that SARS was not entitled to set off these pre-commencement debts against VAT refunds that became due after the commencement of Business Rescue as the tax debt was subject to the Business Rescue plan and was therefore excluded from the operation of a section 191 set-off. It emphasised that section 154(2) of the Companies Act explicitly precludes the enforcement of pre-commencement debts, except as provided for in a Business Rescue plan.
The SCA upheld the appeal, and substituted the High Court’s order with a declaration that:
Both the Income Tax and VAT liabilities were pre-commencement debts.
SARS is not entitled to set off these pre-commencement debts against post-commencement VAT refunds.
This judgment clarifies the treatment of tax debts in the context of Business Rescue, reinforcing the statutory protection afforded to companies undergoing the Business Rescue process.
