‘Reckless Conduct’ versus ‘Intentional Wrongdoing’ - The Accountability of Tax Practitioners
Tax practitioners carry a significant responsibility—they serve as intermediaries between taxpayers and the South African Revenue Service (SARS), ensuring that tax returns are accurate, compliant, and honest. Maintaining high ethical standards is not just about preserving a good reputation, it’s a fundamental duty that protects the public interest and the integrity of the tax system. A recent court case Naraidu v The State (894/2023) involving tax practitioner Mr. Seshin Naraidu highlights the severe consequences that can arise when this ethical duty is breached.
Case Background
The fraudulent activity began when Mr. Mbom, the sole member of Serghony’s Shoes Fashion CC (SSF), registered the business as a VAT vendor and submitted claims to SARS for VAT refunds. These claims, however, were based on fictitious invoices for expenses that never incurred. Once the claims were submitted, SARS flagged them and initially rejected the requests for refunds.
After these rejections, Mr. Mbom approached Mr. Seshin Naraidu, a tax practitioner, to follow up on the status of the refund requests. Mr. Naraidu agreed to assist SSF by contacting SARS on their behalf. He subsequently wrote several emails to SARS, inquiring about the delays in processing the VAT refund and resubmitting documents that were initially flagged. He continued to pursue the VAT refund despite the apparent issues raised.
Submitting False Claims to SARS
During the trial, Mr. Naraidu asserted that he was unaware of the fraudulent nature of the claims and was simply acting at the request of his client. His claim was supported by the fact that his involvement began after the claims had already been filed, and his role, as presented, was to expedite the process by liaising with SARS. Nevertheless, the prosecution argued that, as a tax practitioner, he should have been aware of the false nature of the documentation given his familiarity with VAT claims processes and his access to the supporting documents.
The fraud involved multiple submissions in 2013 claiming substantial VAT refunds amounting to R2,7 million. During the trial, SARS investigators presented evidence showing that the invoices used to support these claims were fictitious. The question remained, however, whether the tax practitioner had knowledge of the fraud when submitting the returns to SARS.
Regional and High Court Judgements: Guilty
The Regional Court found both Mr. Mbom and Mr. Naraidu guilty of 3 counts of fraud, and Mr. Naraidu was sentenced to six years in prison without an option for a fine. Subsequently the High Court upheld this judgement.
Supreme Court of Appeal Judgement: Not Guilty
On appeal, the Supreme Court of Appeal scrutinised the evidence once more. The central issue was whether Mr. Naraidu had:
Knowingly participated in the fraud, with the
Intent to defraud SARS.
The court highlighted that Mr. Naraidu’s emails to SARS, in which he followed up on the refunds, suggested he had access to and was familiar with the false documents submitted. However, there was no direct evidence proving that Mr. Naraidu was aware that the documents were fraudulent.
The Supreme Court concluded that the State had failed to prove beyond a reasonable doubt that Mr. Naraidu had the intent to commit fraud, which led to his acquittal on all charges.
Reckless Action or Intentional Wrongdoing
The court ultimately found that, while Mr. Naraidu acted recklessly, the State could not prove that he knowingly submitted false documents. The requirement of "intent" was central to the decision, and the Court held that mere reckless conduct was insufficient to establish fraud without evidence of knowing misrepresentation.
The court scutinised Mr. Naraidu’s emails to SARS in which he followed up on the refunds. These emails suggested he had access to and was familiar with the false documents submitted. However, there was no direct evidence proving that Mr. Naraidu was aware that the documents were fraudulent.
Lessons We Can Learn
While identifying fraudulent transactions may not be easy, this case is a reminder for tax practitioners to always follow proper processes when accepting a client and submitting returns on their behalf.
Verify all information thoroughly
Don’t accept all information provided by the client without question. Practicing ‘professional skepticism’ is essential part of providing services to clients. Whenever possible verify the authenticity of all supporting documents provided by clients. Even if you are acting as an intermediary, this case demonstrates that you should have complete confidence in the information you present to SARS.
Due diligence – Know Your Client
Acting without proper due diligence or submitting claims without understanding their basis can expose you to severe legal risks. As seen in this case, reckless behavior may not result in a conviction for fraud, but it could still lead to significant reputational damage and legal challenges. Gaining an understanding of the client’s level at an appropriate level will put practitioners in a better position to identify and question transactions.
Document every interaction clearly
Keep clear records of all interactions with clients and authorities. In this case, Mr. Naraidu’s emails were a central piece of evidence. Clear and accurate documentation could either protect you or implicate you, depending on the actions taken.
Maintain high ethical standards
The role of a tax practitioner is critical, not only for clients but also for maintaining public trust in the tax system. Ethical conduct, vigilance, and compliance with the law are non-negotiable components of this role.
CIBA tax practitioners are required to abide by the CIBA’s Tax Standards. These standards provide practical guidance and templates on considerations when accepting a new client.
Become a licensed tax practitioner with CIBA and be able to provide tax services to your clients.
CIBA tax practitioner license will provide you with an opportunity to expand your service offerings.
CIBA’s Licensed Tax Practitioner: Compiler
The Compiler license validates the holder's ethical practice and basic competency in tax compliance, making it ideal for professionals looking to affirm their capability to manage general tax services for individuals and entities. Key functions include:
Handling tax returns, records, and objections.
Managing early-stage SARS queries and audits.
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The Advisor license represents a superior level of tax expertise, essential for those dealing with complex tax situations in large businesses and trusts. This advanced credential confirms the practitioner’s ability to:
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Obtaining these licenses from CIBA not only enhances professional credibility but also equips practitioners with the necessary skills to handle a broad spectrum of tax-related duties effectively.
