Common SME’s tax mistakes
Tax nightmares among owner-managed businesses and SMEs are costly and time consuming, particularly relating to tax queries and disputes with the South African Revenue Services (Sars).
By simply implementing key preventative administrative steps, business owners can actively avoid or at least reduce the risk of these tax mistakes from arising.
Inaccurate accounting information Mistake
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, by, for example, reviewing 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.
The importance of accurate accounting information and supporting documentation is further compounded by tax regulations requiring taxpayers to maintain proof of all income and expenditure as well as maintaining business documentation in a particular format, for example, VAT invoices.
Recommended preventative steps
Steps which a business owner should take to avoid the above:
Employ a competent bookkeeper to maintain accurate accounting records and supporting documentation;
Ensure you have a consistent list of accounts to which expenses and income can be posted for accounting purposes;
Make use of control accounts, which are reconciled on a monthly basis to the external customer / supplier statements – for example, a VAT control account which is reconciled to Sars accounting statements (which are available on request);
Establish clear guidelines for the accounting treatment of business owner private expenses, to ensure that these are posted to a shareholder loan account and not to a business account;
Establish clear guidelines for the recognition of accounting revenue or expenses for income tax and VAT purposes, which Sars will approve. A good example here is the accounting for subscription income / profit arising on long-term building projects or agency businesses;
Where necessary ensure there is a good understanding important tax rulings for complex domestic businesses or businesses with considerable cross border transactions;
If the business holds inventory, ensure that there are clear procedures in place for counting and pricing regular stock-takes
This list of steps is not exhaustive, and will vary depending on the type of business. While a services business may not require a stock-take, it may require the establishment of an agreed method for recognising fee income.
Not taking ownership for tax Mistake
Owners of small to medium business often “leave tax to the bookkeeper / accountant”, without taking ownership of their fiscal responsibilities. It is 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 second 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, particularly as payments are generally allocated by Sars to interest and penalties first before settling the tax capital amount due.
Recommended preventative steps
In order to prevent the above from occurring, business owners should implement the following:
Include direct (income tax) and indirect (VAT, PAYE) into all monthly cash flow plans
Establish a separate bank account into which indirect ‘withholding’ taxes are transferred upon withholding, especially for PAYE and VAT;
Include income tax in monthly / annual business planning forecasts, to ensure that any income tax cash can be provided for and set aside in a separate bank account if necessary;
Engage an external tax adviser to carry out an annual tax ‘health-check’ on the business, to ensure that the necessary tax compliance is up to date and that any tax changes have been implemented, such as PAYE on travel allowances.
Missing the SME tax detail Mistake
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 / no interest loans and the payment of employee debts. These cash-free benefits provided to employees / directors require monthly PAYE withholding tax as well as monthly / annual tax reporting to Sars. The failure to attend to these brings substantial penalties and interest to a business;
Low interest loans or even “no interest” lending advanced by a company to shareholders or related parties may attract secondary tax on companies of 10% or dividend withholding tax of 10% with effect from 1 April 2012.
Recommended preventative steps
Steps which a business owner could take to avoid the above:
Ensure all employment related expenditure is identified in the cash payments records and reported for payroll tax purposes;
Taking professional advice in advance of entering into possibly complicated or unusual transactions
Engage an external tax adviser to carry out a bi-annual PAYE / remuneration tax ‘health-check’, to ensure that all employment benefits are identified, quantified and reported for tax purposes.