It is time to develop the law on tax rectification

Rectification is a wellestablished common law right Scholars have described it as an equitable remedy that generally provides contracting parties with the right to correct mistakes where their common intention has not been reflected in instruments, such as a contract or resolution

In a fiscal environment, examples of such common mistakes that parties can rectify include error in corpore (performance), error in persona (mistake relating to the identity of the parties) and error in negotio (a mistake relating to a juristic act)

SA law remains relatively underdeveloped with the use of rectification in tax matters

The problem is that tax consequences generally arise out of agreements and instruments in the year of assessment in which they are concluded Still, parties may identify the common mistake that needs to be rectified only in subsequent years Reported cases have dealt only with the consequences for contracting parties and none has involved the SA Revenue Service (Sars) as a litigant nor considered the fiscus’ s apparent interest in a rectified instrument

Rectification has been a longstanding remedy in many foreign jurisdictions

After the Juliar decision in 2000, rectification in tax-related cases in Canada has become very popular There is a trend that Canadian courts are broadening the grounds for equitable relief through rectification in tax matters

The UK has a similar dispensation and allows for rectification in tax matters, but only under particular circumstances A recent example (of failed rectification) is MV Promotions Ltd and another v Telegraph Media Group Ltd and another [2020] EWHC 1357 (Ch)

The parties invited HM Revenue & Customs (HMRC) to join these proceedings since it has an interest in the outcome arising out of closure notices (similar to income tax assessments) issued by HMRC

In that case, it was argued that income from a broadcasting contract should be recognised and taxable in the hands of former international cricketer Michael Vaughan rather than in MV Promotions (MVP) MVP is the limited company through which Vaughan provides his nonplaying services to third parties, including his services as a cricket commentator

In 2008, MVP entered into a contract with a broadcaster Vaughan was named as the counterparty who would provide the services Subsequently, the contract was amended to replace Vaughan with MVP as the named counterparty Invoicing under the contract occurred between MVP and the broadcaster, and not Vaughan

Judgment

When the contract was renewed in 2011, the same errors were made as in 2008, likely due to an oversight, and again Vaughan was named the counterparty HMRC assessed Vaughan on the receipts, and the parties applied to the court for an order of rectification The high court judgment noted, regarding rectification, that:

The party seeking rectification must show that:

(1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; (4) by mistake, the instrument did not reflect that common intention ”

In finding against (tax) rectification, the court noted that the broadcaster, MVP and Vaughan had effectively resolved the difficulty over the mistake about the identity of the true counterparty to the 2011 contract among themselves but not in respect to HMRC The question was whether this should have led the court to refuse to exercise its discretion in rectifying that contract

The court answered in the affirmative, declining rectification

The judge noted that an unusual feature of the case was that there was no evidence of any apparent tax-based motive for the 2011 contract It was essentially a tax-based claim in a non-tax-based setting

The court noted: the court will not order rectification of a document if the parties rights will be unaffected and if the only effect of the order will be to secure a fiscal benefit for one or more of them

Clearly, the hurdle for rectification in tax matters in foreign jurisdictions is high One expects a similar high hurdle will be set if SA tax law develops in line with foreign jurisdictions That notwithstanding, development in this area will significantly interest Sars and taxpayers

● Pieter Janse van Rensburg is a director at AJM Tax He also serves as a nonexecutive director on the board of the SA Institute of Taxation