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Taking Charge of the Tax Nightmare

The taxman has become a whole lot leaner and meaner, and while there are some breaks for small businesses, the admin burden on them alone could be crippling. A tax practitioner tells you in plain English how to survive the night of the undead tax return.

Original publication: MTNenterprise, 2013.

tax nightmare

If terms like IRP6 and TT03 fill you with baffled anxiety, a letter arriving from SARS makes you want to skip town, you think ‘record-keeping’ is something to do with ABBA LP’s or Rod Stewart seven-singles, and – what with a hundred other things on the go – your approach to filing tax returns is that you’ll double-cross that bridge when you can get there, then the time is nigh to professionalise your act … whether you like it or not.

Enter the dragon

Always an inescapable force, SARS has got leaner and much meaner, providing tax-breaks to entrepreneurs but also imposing stiff penalties on defaulters. According to Noel Frost, a Cape Town tax practitioner, the introduction in 2011 of the Tax Administration Act has meant that ‘compliancy with SARS is now more of an issue than ever before’. The upshot for small businesses in particular is that their tax admin – the rigmarole of preparing and submitting financial information – ‘takes on a whole new meaning’.

In the past, he says, taxpayers thought primarily of the tax liability itself, asking themselves, ‘What do I owe SARS, have I paid them?’ Filing the paperwork was secondary. If you were small or insignificant enough, it was possible to slip the nets and get away with non-submission by pleading ignorance or saying you didn’t bother sending the forms because in your opinion no tax was due. Nowadays, those statutory documents are ‘non-negotiable’, and the first questions concern proper procedure: ‘Have I submitted the right forms on the right dates, and is the information correct?’

Maze of the zombie

To put that in context, as the owner of a close corporation or company you’re confronting at least six key tax submissions every financial year, never mind other joys like VAT or employee PAYE. There are two annual income tax returns, one for the business and the other for yourself as a natural person drawing income from it, as well as four provisional tax returns – two in respect of the period March-August (one for yourself, one for the biz), and another two for September-February (ditto).

It’s a hefty array, and to remain compliant you have to marshal these returns like a team of Lipizzaner Stallions. As Frost explains, the first hurdle to cross is getting them in timeously even if the declaration is nil; botch the job, and penalties are incurred. But the second hurdle is trickier still, as it relates to the accuracy of provisional tax returns.

Night of the undead tax return

Whereas annual income tax returns are based on a backward-look at a year that’s done and dusted, provisional tax is submitted in the course of the year while it’s still in flux. Anyone who earns anything other than standard employment income is a provisional taxpayer, and because you, as a small businessperson, are a self-employed pirate of the high seas instead of an office drone coughing up monthly payroll tax, SARS is keen to get its cut of the loot sooner rather than later and spare you the trauma of a single tax bill at the end of the year when your treasure chest might be empty.

Though they are calculated in much the same way as annual returns, provisional returns are, in other words, essentially estimates of what you think you owe SARS. Taxpayers are allowed a 10% margin of error, but the converse is equally true: the estimate must be at least 90% correct. It could happen that you make an innocent, klutzy mistake; it also could be that you make a stone of your heart and set out to bulldust the Receiver by understating your tax. Either way, if the figures are more than 10% out of kilter with the annual returns (and not rectified in a third, optional ‘top-up’ provisional tax), there will be penalties, further tax on the underpayment, and interest on it to boot.

Full-body probe in the alien lab

Compliancy, Frost reiterates, ‘is the name of the game’, which means in practical terms that ‘the small business’s books and accounts have to be pretty much up-to-date all the time’. This is no mean feat for such businesses, which are typically limited in terms of expertise, systems and staff, not to mention time, energy and cash flow. After all, there is a side-issue in the admin blizzard, namely, doing the core work of the business and somehow manoeuvring it all through next month’s hell-run of debit orders and other commitments.

So, what to do about tax admin? Four broad solutions are available: eliminate it; leverage it; make it someone’s problem; skill up in partnership with experts.

#1 Eliminate the monster

For starters, if your annual turnover is less than R1-million you can all but eliminate the need for detailed record-keeping by opting to pay turnover tax, which SARS calls ‘an alternative simplified tax system’ targeting ‘mainly small informal businesses’. Unlike standard tax based on net income after expenses, turnover tax is calculated on gross income alone, and though it hence does not allow for deductions, the applicable tax rates are lower than the norm. Things boil down to adding up your payments received, telling SARS what that comes to, and paying a flat rate on it.

Despite its attractive simplicity, Frost warns that turnover tax might not suit everyone. If your expenses are minimal to non-existent, then fine. On the other hand, he says, ‘You might have 500k in turnover but expenses of 480k; in the turnover system you pay tax on the 500k, not the 20k in net profit.’ Not only could you wind up paying more in tax, but since even the turnover system involves keeping financial records, ‘you may as well do this properly [in the standard tax system]’.

#2 Embrace the gory glory

This leads to the second possible solution: accept the inevitability of tax admin and leverage it to your advantage.

Frost notes that people often let an aversion to red tape cloud their judgment when it comes to crucial, founding decisions about the legal structure of their business. Now that the close corporation is not an option for new enterprises, the choices are sole proprietorship, a partnership or company. Many prefer sole proprietorships sheerly because companies look so daunting by comparison – but that may be a mistake, he says. Company red tape is both ‘less cumbersome’ than widely believed and potentially worth the schlep.

Small businesses meeting all of several criteria, chief of which is that their turnover is less than R14-million, can register as formal SME companies and enjoy various benefits that are meant to encourage the growth of entrepreneurship and stimulate the economy. For instance, in 2012, SME companies were not taxed on the first R63,556 of net profit; while sole proprietorships received the same tax-break, the rate for SME companies on profit above that up to R350k was 7%, whereas for sole proprietorships the minimum entry-level was 18%. An SME company structure, that is to say, may be 11% cheaper on tax bills than a sole proprietorship.

What’s more, companies are awarded points dependent on turnover, staff employment and the like; in the case of businesses falling below a certain threshold, ‘the requirement to keep strict, audited financial statements has been done away with, and verification by an Accounting Officer will be sufficient’. Yet although this will ease the compliance burden for many SMEs as well as assuage common concerns – eek! auditors’ fees! OMG! high levels of independent scrutiny! – Frost believes they should nevertheless be diligent about keeping proper accounting records.

The big idea, indeed, is not to run away screaming from tax admin but to embrace it in its gory glory, to leverage it and – most importantly – take charge it of yourself as the business owner.

#3 Outsource the evil

Which is why Frost is ambivalent about solution #3: periodically scooping together a morass of coffee-stained receipts and statements, boxing it up and handing the lot over to an external bookkeeper or accountant. Outsourcing is a logical and often pleasingly affordable strategy for handling your record-keeping, tax calculations and filing if you lack the time and know-how to do it yourself, but Frost emphasises that, for it to work, you must be able to trust that other person implicitly. The danger is not just that you misplace your trust; it’s that you outsource your finances entirely out of mind, thereby losing oversight of, and insight into, what’s going on in your own business.

#4 Show the scum who’s boss

It’s better, he says, to be as ‘hands-on’ as far as possible: to skill up, knuckle down to doing the basics, and to align yourself with experts who can assist with the higher-level work. Ditch paper- and manual-processes – these are time-consuming and frequently inaccurate – and digitise instead by investing in the right software, a cost that pays off in the long run. If accounting’s not your thing, ‘learn more and earn more’ by getting some training. Painful as it might be, set money aside each month for the tax bill. And instead of fleeing from SARS, make a revolutionary move: pick up the phone and call them to query your tax status and request tax clearance certificates.

In short, take charge. The result, Frost says, is that you will be more than tax-compliant. Your ‘business acumen’ will grow; you’ll ‘see the fruits in your business development’. In so doing, there should be a rare victory: making the tax-man work for you.

 

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