As a small business owner, you need to ensure that your company is tax compliant. But with so many other things to focus on, and not being a tax specialist yourself, you may have overlooked something.
If your business isn’t tax compliant, you could land up indebted to SARS or, even worse, you could become liable for penalties. To avoid this, we asked tax specialists for guidelines.
Tip: Taking out a personal loan to help move your business forward is considered good debt.
The importance of tax compliance
According to Johann Benade, associate director of tax at BDO, the importance of tax compliance in small businesses cannot be overemphasized.
“Although many small business owners are aware of this requirement, they are not sure what they should do in order to become tax compliant,” says Benade.
“SARS is aware of this need and has recently issued the latest edition of its Tax Guide for Small Businesses, which sets out the requirements that small business owners should comply with in order to be compliant,” he explains.
He adds that the guide also contains an overview of the various taxes that are applicable to small businesses, and an explanation of the tax rates, rebates, and allowances that may be claimed.
Common tax mistakes you should avoid
According to Nadine Chetty, co-founder at Ecomm Accounting Solutions, small business owners are often bullied by larger corporates into registering for VAT when they do not need to.
“They do this just to get contracts, which is incorrect. Not only does it put a higher admin burden on them but it also imposes a higher accounting burden on them,” says Chetty.
Another common mistake is that some small business owners don’t register for PAYE when they need to. She explains that they often draw salaries without informing their accountants, which leaves huge discrepancies between what their declared salaries are and what was drawn.
According to Sarvesh Chinnapa, financial manager at EasyBiz Technologies, there are three common mistakes that Small to Medium-sized Enterprises (SME) make:
1. Inaccurate accounting information
The accuracy of the underlying accounting information and supporting documentation is directly responsible for the integrity of a taxpayer's income tax return.
In the case of SMEs, this integrity is often queried as a result of a lean accounting function and confusion in distinguishing between the financial affairs of the business owner and the business.
SARS tax auditors are first and foremost focused on testing the reliability of accounting books and records. For example, they review cash accounting records for unusually large or ad hoc payments, on the basis that these often represent private expenses which have been processed as business expenses and claimed for tax purposes.
2. Not taking ownership of tax
Business owners often leave tax to their accountant. It’s important for business owners to be aware of tax submission deadlines and to ensure that tax is paid within these prescribed deadlines. The cost of these mistakes can be high, especially for elements such as the late submission and payment of provisional income tax payments or the submission and payment of monthly PAYE.
When business cash flows are under pressure, tax payments are often the first to be "put on hold" with direct business operating expenses taking precedence. If this persists, expensive non-deductible late payment penalties and interest accumulate quickly until the outstanding tax capital amount is paid.
3. Missing the SME tax detail
There are a number of less obvious tax regulations that SMEs operating in a close corporation or private company structure typically fail to apply. Most of these relate to fringe benefits arising from business expenses and transactions paid by the employer company, such as:
- Quantification and reporting of taxable fringe benefits provided to employees or directors. An example here includes the use of company-owned cars, the use of assets, low or no-interest loans and the payment of employee debts. These cash-free benefits require monthly PAYE withholding tax as well as monthly or annual tax reporting to SARS. The failure to attend to these brings substantial penalties and interest arrears upon a business.
- Low-interest loans or even "no interest" lending advanced by a company to shareholders or related parties may attract secondary tax of 10% on companies, or a withholding of dividends tax of 10%.
Which taxes should you pay attention to?
Chinnapa says that complying with your tax obligations as a small business has been made a lot easier over the past few years.
“If you’re starting out and need to register as a company, you will have to contact the Company and Intellectual Property Commission (CIPC). Once a business has been registered with CIPC, SARS will automatically generate an Income Tax reference number,” says Chinnapa.
She outlines the following taxes that are relevant to SMEs:
1. Turnover tax
Turnover tax is a simplified tax system for small businesses with a qualifying turnover of not more than R1 million per annum. It is based on the taxable turnover of a business and is available to sole proprietors (individuals), partnerships, close corporations, companies, and co-operatives.
Turnover tax takes the place of VAT (in the instance that you have decided not to elect into the VAT system), provisional tax, income tax, capital gains tax, secondary tax on companies, and dividends tax. Qualifying businesses pay a single tax instead of various other taxes. It’s also elective, which means that you choose whether to participate.
2. Value Added Tax (VAT)
It is mandatory for any business to register for VAT if the income earned in any consecutive 12-month period exceeded or is likely to exceed R1 million. Any business may choose to register voluntarily if the income earned in the past 12-month period exceeded R50,000.
A small business that is registered as a micro-business under the Sixth Schedule of the Income Tax Act may also register for VAT and may elect to submit returns and payments every four months, ending on the last day of June, October, and February.
3. Pay-As-You-Earn (PAYE)
According to law, an employer must register with SARS within 21 business days after becoming an employer, unless none of the employees are liable for normal tax.
READ MORE: Complete guide on personal income tax
4. Unemployment Insurance Fund (UIF)
This gives short-term relief to workers when they become unemployed or are unable to work because of maternity leave, adoption leave, or illness. It also provides relief to the dependents of a deceased contributor. All employees, as well as their employers, are responsible for contributions to the UIF.
5. Skills Development Levy (SDL)
This is a levy imposed to encourage learning and development in South Africa and is determined by an employer's salary bill. The funds are to be used to develop and improve the skills of employees.
Chetty recommends that small business owners invest in cloud accounting software with an accountant who understands cloud accounting, where you should be able to manage your cash flow and taxes daily. Have a look at this article to find out how to choose a tax practitioner that’s right for you.
“Paying Tax in South Africa is not a choice. It is a legal requirement,” says Chetty.
Have you tried our income tax calculator? Find out how much tax you’ll pay on your ideal salary.