SARS is coming after hundreds of employers in South Africa

The South African Revenue Service (SARS) is intensifying enforcement against abuse of the Employment Tax Incentive (ETI) through a landmark test case affecting over 330 employers.

This means that taxpayers claiming the benefit will now face greater scrutiny and risk, according to Tax Consulting South Africa’s head of tax controversy and dispute resolution, André Daniels.

The abuse of the ETI, designed to stimulate youth employment in South Africa, has long been on SARS’s radar.

Now, after years of refining the legislative framework, the tax authority has shifted its focus toward active enforcement.

This is evident from a test case in court, where SARS is seeking clarity on the interpretation and application of the ETI. The outcome is expected to affect more than 330 employers identified for allegedly improperly claiming ETI credits.

A recent matter before the court, although relating to a joinder application for participation in the test case, sheds light on the core issue to be decided and signals that SARS is stepping up to enforce the rules and curb perceived abuse.

While legislative changes have been ongoing, industry sentiment has often been that SARS’ enforcement action has lagged behind.

Legislative amendments introduced in 2021 and 2023 were specifically aimed at addressing practices inconsistent with the ETI’s intent.

“For some time, legislative changes have been introduced with comparatively limited visible enforcement from SARS,” Daniels said. “The test case, however, may suggest a growing focus by the tax authority in this area.”

The Tax Administration Act (TAA) and the rules thereof empower SARS to designate a dispute as a “test case” where multiple taxpayers are affected by substantially similar legal and factual issues.

In this instance, the test case is intended to clarify the efficiency and consistency of the interpretation and application of the ETI.

This is particularly relevant for arrangements structured to obtain benefits that are not aligned with the ETI’s purpose.

According to Daniels, a test case can serve as an appropriate mechanism to promote greater certainty.

It is especially useful where SARS identifies practices among multiple taxpayers involving substantially similar legal and factual issues that may not fully align with the spirit of the law.

Alternatively, with the National Treasury’s intended amendments, Daniels said it may be worthwhile for SARS to consider a test case as a constructive step in its enforcement approach.

Increased scrutiny and enforcement

Both SARS and the National Treasury have, for several years, flagged concerns that the ETI was being used by taxpayers to benefit in ways that fall outside its intended purpose.

Since its introduction on 1 January 2014, the ETI has aimed to reduce the cost of employing young South Africans and encourage job creation through a cost-sharing mechanism between government and employers.

The incentive allows qualifying employers to reduce their Pay-As-You-Earn (PAYE) liability, without affecting employees’ wages.

However, government communications, including Budget Speeches and SARS revenue announcements, have repeatedly highlighted schemes designed to extract unintended tax benefits from the incentive.

ETI abuse has been acknowledged as a systemic issue, undermining both the fiscus and the policy intent of the incentive.

SARS’s own reporting reflects this concern, with ETI-related audits and investigations forming a consistent part of its compliance focus.

The 2024 Budget Review stressed this point and proposed that punitive measures to support amendments be refined in the legislation to address the abusive behaviour of certain taxpayers towards the incentive.

Similarly, SARS’s 2022/23 revenue announcement highlighted ETI as an audit focus area, with significant recoveries linked to PAYE ETI audits.

The move toward a test case has been broadly welcomed within the industry, particularly as it reflects a shift from ongoing legislative changes to tangible enforcement action.

Tax incentives rely not only on clear rules but also on consistent enforcement to maintain their integrity and achieve their intended outcomes. However, this development serves as a broader caution to taxpayers.

Structures or solutions marketed as mechanisms to access ETI benefits should be approached with care to ensure they do not fall outside the spirit and requirements of the law.

For professional advisors and taxpayers alike, the message is clear – ETI arrangements are likely to face increased scrutiny and enforcement, particularly given the number of employers already on SARS’s radar.