In a 2019 report by Small Business, Institute Chairman, Bernard Swanepoel, he says, ‘98.5% of South Africa’s economy is made up of small businesses (SMEs).’ SMEs may be creative, hardworking and have a great product or service to sell, but they do not always have the background to keep their taxes in order’.
Graeme Saggers, Tax Director at Nolands agrees, ‘While struggling to keep the business afloat, deadlines tend to come and go. There are penalties payable for late submissions and late payments – a cost most small business is unable to carry’.
Tips for SMEs when it comes to tax compliance.
- Know your deadlines! SARS immediately institutes penalties if certain tax payments are late and impose administrative penalties if tax returns are late. The most important thing for an SME is making declarations and payments on time.
- Supporting documents Collating all supporting documents for income earned and expenses claimed can be a tedious process but it needs to be in order. We recommend that you keep your bookkeeping up-to-date throughout the year, to make things easier.
- Keep copies for five years Legislation requires that SMEs keep both a hard copy and electronic version of all documentation for a minimum of five years. Scanned copies can be stored online using cloud services.
- Know what you can deduct Make sure you are familiar with what deductions are allowed for SMEs so that you don’t pay more tax than you need to. Whether you rent or own the building from which you operate, it is a business expense.
- Registering for VAT VAT registration brings with it many regulations and statutory requirements. However, if you have a turnover of over R1 million a year, you are required to register for VAT. The process is very involved and can be lengthy. Small businesses have to acquire the services of an accountant or tax practitioner to assist them in this process, driving up the costs for the small business owner.
- How do small businesses account for VAT? In accordance with the VAT Act, if registered for VAT, small businesses have to issue proper tax invoices, charge their customers VAT at 15% and pay this over to SARS on a monthly or bi-monthly basis. This payment can be reduced by the input VAT that the small business is being charged by their suppliers.
- What is turnover tax and how does an SME register? Turnover tax is a simplified system aimed at making it easier for micro businesses to meet their tax obligations. The turnover tax system replaces Income Tax, VAT, Provisional Tax, Capital Gains Tax and Dividends Tax for micro-businesses with a qualifying annual turnover of R1 million or less.
- What are the consequences of non-compliance? An Administrative Non-Compliance Penalty (Admin Penalty) is a penalty a taxpayer must pay for non-compliance with various requirements. The amount charged will depend on a taxpayer’s taxable income and can range from R250 up to R16 000 a month, for each month that the non-compliance continues. Interest is added to unpaid taxes along with severe penalties.
- Verification Proof is in the documentation. The most important thing, says Saggers, is to keep a record of all business expenses in logical order so that if SARS asks for verification, you have them available immediately.
- Depreciation If you complete your own tax returns, make sure you are familiar with depreciation rates. Wear and tear on a car, for example, is calculated differently from a computer.
- Selected for a tax audit? The word ‘tax audit’ strikes fear into most people – even if you have nothing to hide. If you have ever been targeted for a SARS' audit you will know the feeling. During a tax audit, SARS will interrogate the viability of expenditure closely and penalise taxpayers for incorrect filings. ‘SARS has some steep targets to meet this fiscal year and there will be a substantial increase in the number of tax audits conducted by SARS,’ says Melanie le Roux, MD of GreatSoft Financial Services.
- SMEs know your rights! Whether it is an internal desk audit or an in-depth audit in more high-level risk cases, it’s a stressful, time-consuming and onerous task. Not to mention expensive. Your accountant/tax consultant (or tax attorney if necessary) will need to collate information and follow the strict procedural rules.
No-one enjoys the admin of keeping an accurate and up-to-date record of your business’s income and expenses but it is critical to do this, allocating them to the various categories to ensure a smooth tax return. If your business can afford it, invest in accounting software otherwise use a basic spreadsheet.
Small businesses or individuals will need to complete a short test Click here to see if they qualify for turnover tax, which is available on the SARS website. If they qualify for turnover tax, they then need to complete a TT01 form. (Click here)
The application should be sent before the beginning of a year of assessment, which runs from 1 March to 28 February.
From the very outset of a tax audit, it is extremely important that you are aware of your rights and to let SARS know that! You are protected by the Tax Administration Act (TAA), the Promotion of Administrative Justice Act (PAJA) and the Constitution. Which means you need proper (and complicated) scrutiny measures during the tax audit and dispute process. A task which requires time, experience and special expertise. Generally speaking, tax accountants are not tax law experts, which is a very different and specialised skill set. This is where tax attorneys would support tax accountants.
Ensuring tax experts are accessible and affordable for SMEs
‘To ensure your rights as a taxpayer remain protected, it is imperative that you have experts holding your hand during the tricky tax audit process,’ says le Roux.
‘For this reason, we have launched TaxAssist (tax risk insurance) which is perfect for SMEs. Tax Risk insurance will cover the cost of employing a team of top tax specialists in the event of a SARS’ tax audit or dispute. This may include Tax Attorneys, Auditors, Tax Specialists, Accountants and other Tax Advisors who may be required to ensure a fair audit outcome. The advantage of this cover is that it also includes the cost of your current accountant/tax consultants’ fees.