A narrow escape: Supreme court of appeal acquits tax practitioner in VAT fraud case
A narrow escape: Supreme court of appeal acquits tax practitioner in VAT fraud case
By Martin Groenewald, Tax Consultant and Associate Professor David Warneke, Partner
In the recent judgment of Naraidu v The State [2024] ZASCA 139, the Supreme Court of Appeal (SCA) overturned the conviction of Mr Seshin Naraidu (Naraidu), a tax practitioner, on charges of fraud and statutory contraventions under the Value-Added Tax Act (VAT Act) and the Tax Administration Act (TAA). The case highlights the risks for tax practitioners when failing to exercise due diligence in handling their clients' tax matters.
Background
Naraidu, together with Serghony’s Shoes Fashion CC (SSF) and its sole member, a Mr Mbom (Mbom), were charged with three counts of fraud and three alternative charges under the VAT Act and section 269(9) of the TAA. The allegations centred on an attempt to defraud SARS by misrepresenting expenses that purportedly entitled SSF to VAT refunds, knowing that the claim was false.
With Naraidu’s assistance, SSF submitted a VAT refund claim amounting to R2,748,038, supported by fictitious invoices. A subsequent investigation by SARS revealed that the invoices supporting the VAT claim were false.
At trial, Mbom and Naraidu were both convicted of fraud in the Regional Court. Mbom, who failed to return for sentencing, remains unapprehended, while Naraidu was sentenced to six years in prison without the option of a fine. Naraidu appealed his conviction to the High Court, which upheld the Regional Court's ruling. He was then granted special leave to appeal to the SCA.
Supreme Court of Appeal
The key issue before the SCA was whether the State had proved beyond a reasonable doubt that Naraidu had knowingly participated in SSF’s scheme to defraud SARS through a fictitious VAT refund claim.
The State contended that numerous emails sent by Naraidu to SARS, enquiring about the VAT refund status, demonstrated that he had sight of and access to the fraudulent documents. However, the witnesses called by SARS could not confirm who had lodged the claim on the e-filing system. Nevertheless, Naraidu’s emails indicated that he had access to the system and, at the very least, had resubmitted the documents.
Naraidu argued he was unaware of the fraudulent nature of the VAT refund claim and only acted as an intermediary on behalf of SSF. He testified that in October 2013, he was a financial adviser for Liberty Life and that a client had given him a referral list to call persons there listed to try to sell Liberty policies. On the list was a person he described as the owner of SSF. Naraidu met this presumed owner of SSF at a restaurant in Midrand in October 2013. The presumed owner showed Naraidu his driver’s licence and the registration papers of SSF. The presumed owner then sought the assistance of Naraidu, as a tax practitioner, to pursue a VAT refund claim with SARS on behalf of SSF. He agreed to do so. Of the emails that he then wrote to SARS, Naraidu stated: “I have just said that I had no knowledge of what was happening. I was enquiring and hoping the client once it was resolved would sign a policy . . . that is how I ran my Liberty business.”
Naraidu’s version was thus that he wrote the emails to prompt SARS to pay the VAT refund, but that he had no knowledge of the basis upon which the claim was made. His incentive was to assist the presumed owner in order to sell him a Liberty policy. The emails were the primary source of the State’s evidence against him.
The SCA acknowledged that there was a great deal that was unsatisfactory about Naraidu’s evidence, including how he came to be retained, his willingness to engage with SARS on behalf of a client he knew little about and his actions in submitting documents without a proper mandate. While the Court found these actions indicative of a reckless disregard for his duties as a tax practitioner, it emphasised that this was not the charge he was facing.
The critical question was whether he had knowingly participated in the fraud perpetrated on SARS.
The SCA emphasised that establishing fraud requires proof of intent. While Naraidu’s actions may have been reckless in that he submitted the fraudulent documents, there was no conclusive evidence to prove that he knew the documents were fraudulent. The court clarified that recklessness is not sufficient to establish the intent necessary for a conviction of fraud.
The Court raised doubts about the validity of the alternative charges under the VAT Act and the TAA, since the statutory provisions cited had been repealed at the time of the alleged offenses. More importantly, the prosecution had failed to meet its burden of proving that Naraidu had intentionally submitted a claim knowing that SSF was not entitled to the refund.
Considering the lack of evidence proving intent beyond a reasonable doubt, the SCA set aside the convictions and acquitted Naraidu of all charges.
Implications
This ruling reinforces the principle that criminal liability in fraud cases requires proof of intent, rather than mere recklessness. For tax practitioners, the judgment serves as a stark reminder of the importance of exercising caution and due diligence when handling clients' tax matters. It is worrying that the matter went all the way to the SCA before Nairadu’s eventual acquittal, given the apparent lack of evidence supporting the legal requirement of intent.
In the recent judgment of Naraidu v The State [2024] ZASCA 139, the Supreme Court of Appeal (SCA) overturned the conviction of Mr Seshin Naraidu (Naraidu), a tax practitioner, on charges of fraud and statutory contraventions under the Value-Added Tax Act (VAT Act) and the Tax Administration Act (TAA). The case highlights the risks for tax practitioners when failing to exercise due diligence in handling their clients' tax matters.
Background
Naraidu, together with Serghony’s Shoes Fashion CC (SSF) and its sole member, a Mr Mbom (Mbom), were charged with three counts of fraud and three alternative charges under the VAT Act and section 269(9) of the TAA. The allegations centred on an attempt to defraud SARS by misrepresenting expenses that purportedly entitled SSF to VAT refunds, knowing that the claim was false.
With Naraidu’s assistance, SSF submitted a VAT refund claim amounting to R2,748,038, supported by fictitious invoices. A subsequent investigation by SARS revealed that the invoices supporting the VAT claim were false.
At trial, Mbom and Naraidu were both convicted of fraud in the Regional Court. Mbom, who failed to return for sentencing, remains unapprehended, while Naraidu was sentenced to six years in prison without the option of a fine. Naraidu appealed his conviction to the High Court, which upheld the Regional Court's ruling. He was then granted special leave to appeal to the SCA.
Supreme Court of Appeal
The key issue before the SCA was whether the State had proved beyond a reasonable doubt that Naraidu had knowingly participated in SSF’s scheme to defraud SARS through a fictitious VAT refund claim.
The State contended that numerous emails sent by Naraidu to SARS, enquiring about the VAT refund status, demonstrated that he had sight of and access to the fraudulent documents. However, the witnesses called by SARS could not confirm who had lodged the claim on the e-filing system. Nevertheless, Naraidu’s emails indicated that he had access to the system and, at the very least, had resubmitted the documents.
Naraidu argued he was unaware of the fraudulent nature of the VAT refund claim and only acted as an intermediary on behalf of SSF. He testified that in October 2013, he was a financial adviser for Liberty Life and that a client had given him a referral list to call persons there listed to try to sell Liberty policies. On the list was a person he described as the owner of SSF. Naraidu met this presumed owner of SSF at a restaurant in Midrand in October 2013. The presumed owner showed Naraidu his driver’s licence and the registration papers of SSF. The presumed owner then sought the assistance of Naraidu, as a tax practitioner, to pursue a VAT refund claim with SARS on behalf of SSF. He agreed to do so. Of the emails that he then wrote to SARS, Naraidu stated: “I have just said that I had no knowledge of what was happening. I was enquiring and hoping the client once it was resolved would sign a policy . . . that is how I ran my Liberty business.”
Naraidu’s version was thus that he wrote the emails to prompt SARS to pay the VAT refund, but that he had no knowledge of the basis upon which the claim was made. His incentive was to assist the presumed owner in order to sell him a Liberty policy. The emails were the primary source of the State’s evidence against him.
The SCA acknowledged that there was a great deal that was unsatisfactory about Naraidu’s evidence, including how he came to be retained, his willingness to engage with SARS on behalf of a client he knew little about and his actions in submitting documents without a proper mandate. While the Court found these actions indicative of a reckless disregard for his duties as a tax practitioner, it emphasised that this was not the charge he was facing.
The critical question was whether he had knowingly participated in the fraud perpetrated on SARS.
The SCA emphasised that establishing fraud requires proof of intent. While Naraidu’s actions may have been reckless in that he submitted the fraudulent documents, there was no conclusive evidence to prove that he knew the documents were fraudulent. The court clarified that recklessness is not sufficient to establish the intent necessary for a conviction of fraud.
The Court raised doubts about the validity of the alternative charges under the VAT Act and the TAA, since the statutory provisions cited had been repealed at the time of the alleged offenses. More importantly, the prosecution had failed to meet its burden of proving that Naraidu had intentionally submitted a claim knowing that SSF was not entitled to the refund.
Considering the lack of evidence proving intent beyond a reasonable doubt, the SCA set aside the convictions and acquitted Naraidu of all charges.
Implications
This ruling reinforces the principle that criminal liability in fraud cases requires proof of intent, rather than mere recklessness. For tax practitioners, the judgment serves as a stark reminder of the importance of exercising caution and due diligence when handling clients' tax matters. It is worrying that the matter went all the way to the SCA before Nairadu’s eventual acquittal, given the apparent lack of evidence supporting the legal requirement of intent.