When a tax dispute is settled and paid in full, both individual and corporate taxpayers are inclined to assume the matter is closed. However, the South African Revenue Service (Sars) doesn't always play by the same set of expectations, as seen in court recently.
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FreepikAccording to Nico Theron, founder of Unicus Tax Specialists, this issue raises fundamental questions about certainty and fairness in tax administration.
“At its core, a settlement should bring certainty. If a taxpayer pays what was agreed, they should be able to move on without the risk of ongoing interest being added behind the scenes,” says Theron.
The case that changed the conversation
The case of Inhlakanipho Consultants (Pty) Ltd v CSARS involved a VAT dispute that was resolved through alternative dispute resolution (ADR). A formal settlement agreement was reached, confirming the final amount payable, and the taxpayer paid this amount in full.
Despite this, Sars continued to treat the liability as if it had not been fully settled. But, how does this happen?
Sars applied its internal payment allocation rules in a way that prioritised interest and penalties over the original tax debt (the “capital”). This meant that, technically, part of the capital remained unpaid, even after the agreed amount had been settled, allowing interest to continue accruing.
“This is what we often refer to as the ‘allocation game’,” Theron explains. “If payments are applied in a certain way, it can create the impression that a debt still exists, even when the taxpayer has paid exactly what was agreed.”
Sars relied on section 166 of the Tax Administration Act to justify this approach, a provision that allows Sars to allocate payments against different components of a tax debt.
The court pushes back
The High Court firmly rejected Sars’ position, ruling that the settlement agreement was “clear and unequivocal” and that Sars could not reinterpret the deal after payment in a way that undermines its purpose. In essence, a settlement is meant to bring finality to a dispute, not prolong it.
“The court made it clear that settlements are not just administrative steps, they are binding agreements,” says Theron. “Sars cannot accept payment and then use internal mechanisms to effectively undo the finality of that agreement.”
The court also dismissed arguments that system limitations justified Sars’ approach, reinforcing that administrative convenience cannot override legal obligations.
Interest: What still applies?
Importantly, the judgment does not mean that interest is never payable. Interest that accrued before payment may still be due. However, what the court rejected was the idea that interest can continue to run after a taxpayer has already paid the agreed settlement amount in full.
“The key distinction is timing,” Theron notes. “This case wasn’t about avoiding interest altogether — it was about stopping interest from continuing to accrue after the debt was settled.”
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This judgment is not a blanket rule for all settlements. Agreements differ, and some may explicitly address how interest and payment allocation must be handled.
However, it does establish an important principle: where a settlement is intended to be final, Sars may not be entitled to rely on its standard allocation rules to extend the life of a tax debt.
“If you’ve settled with Sars, paid the agreed amount, and you’re still seeing interest being added afterwards, that’s a red flag,” says Theron. “It may be worth reviewing whether Sars is entitled to do so in your specific case.”
For both corporates and individuals, the takeaway is clear: do not assume that payment automatically means closure.
Understanding how settlement agreements are structured, and how Sars applies payments, can have significant financial implications. In a landscape where disputes are increasingly common, being proactive and informed is key to ensuring that “final” really does mean final.
