Understanding the impact of tax compliance on business survival

Many business owners regard tax compliance as the exclusive responsibility of the accounting function. They focus on filing returns, making payments to Sars, and obtaining the necessary certificates. When issues arise, the expectation is that the bookkeeper, accountant, or tax practitioner will resolve them.

This perspective is no longer sufficient.

A recent High Court judgment involving the liquidators of Zikhulise Cleaning Maintenance and Transport CC and eThekwini Municipality demonstrates that a tax issue can extend far beyond Sars. Such matters may impact tenders, contractual obligations, payments, creditor relationships, banking arrangements, liquidation proceedings, litigation, and the reputational standing of all parties concerned.

This matter was not a routine tax dispute, nor was the court required to determine the correctness of Sars’s assessment. The practical implication for business owners is that they simultaneously lose control over their tax affairs, legal identity, and payment processes.

According to the judgment, Zikhulise Cleaning Maintenance and Transport CC was a construction business that had been awarded public-sector housing work in KwaZulu-Natal. Sars later brought winding-up proceedings against the close corporation. The judgment records that the business had already stopped operating because it could not obtain confirmation of its tax compliance status due to substantial outstanding tax debt.

This constitutes the first key lesson.

A tax compliance issue is not confined to the SARS eFiling profile. It has tangible commercial consequences, potentially affecting a company’s eligibility to tender, its ability to receive payments, customer confidence, banking relationships, and ongoing support from creditors.

In many instances, cash flow constraints force business owners to prioritise payments to suppliers, employees, landlords, banks, and yes, deferring obligations to Sars. While this approach may provide temporary relief, once tax debt reaches a level that compromises its tax compliance, the business risks forfeiting the commercial standing necessary for continued operations.

This is the point at which significant risk arises.

In the Zikhulise matter, a new company, Zikhulise Group (Pty) Ltd, was incorporated. The judgment records disputes about whether the close corporation had been converted, whether the new company was a separate legal entity, and whether eThekwini had been misled into making payments to the wrong entity.

The court did not adjudicate the principal claim, which is a material consideration. Allegations of fraud, misrepresentation, and irregular payments remain unproven until determined by the court. Nevertheless, the facts set out in the judgment illustrate the risks inherent in transferring contracts, invoices, and payments between related entities without proper legal and tax documentation.

For a business owner, the practical question is: if your company has the contract but another company sends the invoice, who is legally entitled to the money?

Although this may appear to be a technical issue, it is in fact fundamental. The distinction determines whether payment is properly effected or whether a significant dispute may arise in the future.

The judgment records that payments of approximately R169 million were made to Zikhulise Group, not to the close corporation that the liquidators say was entitled to the money. The liquidators then sued eThekwini, arguing that the payments did not discharge what was owed to the insolvent estate.

In matters involving public funds, the public-interest considerations are clear. Payment controls must be precise. Municipalities cannot rely on similar names, common ownership, or informal explanations. It is essential to establish which legal entity performed the work, which entity is entitled to payment, whether that entity is subject to liquidation, and whether banking and tax records are consistent.

For business owners, the same principle applies in the private sector.

It is common for South African businesses to operate through multiple entities, such as operating companies, property companies, trusts, family companies, newly incorporated entities for tenders, and legacy companies with existing debt. Such structures are not inherently inappropriate and may be commercially justified. However, significant risk arises when these entities are treated as interchangeable.

These entities are not interchangeable.

A company cannot be substituted into or out of a contract solely based on common ownership. Tax issues cannot be resolved by issuing invoices from an entity with a better compliance record. Payments into a bank account require a clear legal basis. Where an entity is in liquidation, under business rescue, or engaged in a dispute with Sars, directors must exercise particular caution before transferring contracts, personnel, invoices, or income streams to another entity.

The High Court also dealt with eThekwini’s attempt to require the liquidators to provide security for costs before continuing with the litigation. In simple terms, eThekwini wanted protection in case it won the case but could not recover its legal costs from the insolvent estate.

The court dismissed that application. The court found that eThekwini had not placed enough facts before it to show that the liquidators would be unable to pay costs if unsuccessful. The court also noted the broader public-interest concern: where an organ of state is involved, it should not use financial pressure to block litigation that has not been shown to be frivolous or abusive.

While this aspect of the judgment is significant, it does not constitute the principal lesson for business owners.

The primary lesson is that tax compliance, legal structure, and payment authority must be managed in an integrated manner.

A failure in any one of these areas exposes the others to risk.

Business owners should implement the following five practical measures.

First, tax compliance status should be monitored proactively to prevent a crisis. It is essential not to delay until a tender closes, a payment is withheld, or Sars initiates collection proceedings.

Second, ensure that each invoice is issued by the entity that holds the contract and has performed the work.

Third, maintain alignment among Sars, CIPC, VAT, PAYE, banking, and beneficial ownership records. Discrepancies between records introduce commercial risk.

Fourth, do not move business from one entity to another without written agreements, board approvals, and tax advice.

Fifth, where Sars debt poses a threat to the business, address the matter through formal channels. Depending on the circumstances, available options may include a payment arrangement, a suspension request, dispute resolution, compromise, restructuring, or seeking business rescue advice. Informal solutions that lack proper documentation should be avoided.

The Zikhulise judgment is therefore not merely a case concerning a municipality, liquidators, and a substantial payment dispute. It serves as a caution to all businesses that regard tax compliance as a mere administrative function.

In the current business environment, tax status is not limited to a compliance certificate. It forms part of the licence to trade, the ability to tender, credibility with financial institutions, and the right to receive payment.

Once tax compliance status is compromised, the resulting costs are seldom confined to Sars.

* Oberholzer is the CA(SA), M Com (Tax), CEO of Fyncor Advisory.

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