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What small businesses need to know to be tax-compliant

Arm yourself with knowledge, advises Yasmeen Suliman from Bowmans.
Entrepreneurs don't always have money for tax advice, but the Sars website can assist them to learn for themselves. Image: Shutterstock

In the past few weeks, we’ve seen many small businesses struggling to obtain funding. One of the reasons may be that they are not tax-compliant. In this week’s episode, we talk to Yasmeen Suliman, an executive at Bowmans, on how startups can comply with tax requirements.

MELITTA NGALONKULU: Welcome to the Small Business Conversations podcast. My name is Melitta Ngalonkulu. Tax season is upon us, and in the past few weeks we’ve seen many small businesses struggling to obtain funding. One of the reasons [may be] that they are not tax-compliant.

In this week’s episode, we talk to Yasmeen Suliman, an executive of Bowmans with over 20 years’ experience in tax. She specialises in assisting companies with Sars [South African Revenue Service] audits, tax services and compliance. Yasmeen, thank you so much for your time. What tax returns can small businesses receive from Sars?

Yasmeen Suliman, tax executive at Bowmans. Image: Supplied

YASMEEN SULIMAN: Hi, Melitta. I think it rather depends on what a small business has registered for. Generally, any business would need to be registered for income tax. And, depending on whether you are making enough supplies during the course of the year, you may need to be registered for Vat [value-added tax]. If you have employees you may need to be registered for PAYE [pay-as-you-earn tax], and so on.

So the number of taxes that a small business would need to account for would depend on each position, and what it has applied to Sars for, and what it is required to have registrations for. The situation’s different for really small businesses versus your medium-sized businesses.

MELITTA NGALONKULU: Yasmeen, how do you start to perhaps comply?

YASMEEN SULIMAN: Well, I think the first thing is to arm yourself with knowledge. A lot of businesses or entrepreneurs in that sort of position don’t have a lot of money to go and get external advice. A lot of them have to learn it for themselves, and the Sars website is actually very helpful in that regard.

Knowledge is power. You need to know what you need to do, what you need to register for, and then what needs to be done on an annual or semi-annual basis or on a monthly basis in order to be compliant. If you’re not able to find that information yourself, you need to seek help.

The reason I’m saying that is because, as an entrepreneur, you’ve got a lot of other issues to deal with. You’ve got operational matters, you’ve got to get your business off the ground.

If you can afford it, if the business can afford it, I think it best to seek external advice on what the different compliance requirements are from a tax point of view.

MELITTA NGALONKULU: Yasmeen, would you say that this is a time-consuming process?

YASMEEN SULIMAN: Sars does feel that a lot of fraud is perpetrated, and people or businesses who won’t be registered may not be legitimate businesses. So, at the registration point, especially for taxes like that, where you are able to get a refund, they do apply quite strict verification processes and so on.

My personal view on it is that Sars has missed the point a bit with some of the processes that it follows. I think the aim should really be to get as many taxpayers onto the register as possible. So it should be easy for someone or a business to register, to pay tax. Sars should rather dedicate efforts towards the point of refund verification rather than at the point where you register.

I spent some time at Sars, and I know that during that time there were a few Vat frauds that were uncovered. A lot of that Vat fraud was not so much with new registrations, but with existing companies or taxpayers on the books, where there had been some kind of collusion and details of taxpayers were changed in order to misdirect funds, or to claim fraudulent Vat refunds and so on. So they’re spending too much of time on the registration process. Where Sars verifies who they are dealing with can come to naught if details change. It’s easy to change details later.

So one of the things that taxpayers need to know is that, while they may be required to be registered in certain cases for certain tax types, it may not be as easy to obtain that [information] at [the time of] registration with Sars.

MELITTA NGALONKULU: Yasmeen, what is turnover tax, and how do SMEs [small and medium-sized enterprises] register for it?

YASMEEN SULIMAN: The turnover tax is directed at a very specific portion of our business community. Those are really small businesses. So, turnovers of less than R1 million per annum. And if you think about that, you have to have a turnover of less than R80 000 or R82 000 a month, which translates – in 21 working days – to about R4 200 a day. These are really almost like your hawker traders, those sole proprietors who sell things, or certain home industries and so on.

Now, the turnover tax is something that replaces all the other taxes that you may be liable for. So it is quite attractive.

It’s a relatively easy process to register. You download the form [from] the Sars website, or you can fill it in online. But, generally, Sars expects you to register at a branch, or you need to submit those forms via post to them. So they need physical submission of these forms.

Again, I think it’s a case of them wanting to verify who it is that needs to be in that [classification] – whether you are correctly going into the turnover-tax regime – because the moment your turnover in your business ends up being more than R1 million, you cannot be part of that regime any more.

One of the other regimes that is quite popular in the small business or SMME environment is the small business corporation regime. That is for companies whose turnovers are less than R20 million. Now, obviously there are requirements to be met. You can’t have any other business and things like that, but it’s very popular for entrepreneurs starting their first business, and especially in that phase where they’re still growing their business and the turnover is still less than R20 million per annum. There are lower tax rates that are for taxable income generated by those companies. So it’s almost like you are trading as a sole proprietor and you are getting the benefit of having the rebate applicable to natural persons, but you’ve got the shelter of being in a corporate form. That we see is quite popular among the small and medium businesses that operate in our society.

MELITTA NGALONKULU: Yasmeen, how would small businesses account for Vat?

YASMEEN SULIMAN: Well, if you are required to be registered for Vat, or you’ve done a voluntary registration for Vat because your turnover is going to be more than R50 000 in a year, actually the Vat requirements that apply to you are pretty much the same as those that apply to bigger businesses.

The Vat rules don’t really change if you’re a small business versus big business.

So, if you’re making sales or you’re charging for services, and you’re required to charge Vat on that, you would do that in the same way as big businesses would. If you are exporting goods out of South Africa and you need to do zero-rated Vat, the rules that would apply to you would be the same as for bigger businesses.

By the same token, if you wanted to claim back any Vat on your expenses, the rules that apply to you would be the same rules that would apply to big business. So there’s very little distinction in the Vat Act as far as the rules go. It applies across the board for all taxpayers or all Vat vendors.

There is one sort of dispensation that is given for sole proprietors.

If you’re trading in your personal capacity, and your turnover per annum is less than R2.5 million, so roughly less than R200 000, or just about R200 000 a month, instead of accounting for Vat on an invoice basis, you can decide to account for Vat [on a] payments basis – these are for vendors that sell a lot on credit. You only then need to pay for the Vat output when your debtors pay you.

So you don’t have to account for Vat as you issue invoices; you only have to do so when you receive the cash. So, from a cashflow point of view, it helps.

The flip side to that obviously is that if you don’t pay your creditors or your suppliers, you’re not going to be able to claim your Vat back either. That’s the only thing I could find in our Vat legislation that would be of benefit for a smaller business. And then it’s a very particular small business – it’s a sole proprietor kind of business.

If you’re running your business through a company, the Vat rules that apply to you as a small business with a turnover of R2 million or R5 million a year, whatever, versus a company that’s got an R500 million turnover, is pretty much the same. There’s no real distinction made for smaller [businesses].

MELITTA NGALONKULU: Yasmeen, you’ve been a tax practitioner for over 20 years.

YASMEEN SULIMAN: Oh, don’t remind me

MELITTA NGALONKULU: Would you say that Sars has actually made the process for small business owners to register and pay for their taxes independently easier over the years? Or are they still reliant on tax practitioners?

YASMEEN SULIMAN: I started a little bit more than 20 years ago, so I’m giving away my age. When I studied at university our tax laws were published in a textbook. We still get the same textbook these days, but now it’s double the size and it comes in two volumes, versus one volume 20, 25 years ago. So definitely over the last 20 years, our tax laws have become more complex. And every year without fail, there are amendments because our National Treasury feels there are loopholes that they need to close. There are additional tax amendments that they bring in, in order to raise more revenue or to cater for court cases that have gone against them, and against their tax policy also.

So definitely in terms of tax rules, it’s a lot more complicated than it used to be. I’ve been a practitioner for many years, I’ve specialised in South African tax and I can’t tell you hand on heart that I know everything there is to know about South African tax. If that’s me as a practitioner speaking, then a person who is running a business and has more to worry about than tax, surely cannot know everything they need to know. Having said that, Sars has made it a little easier to register in certain cases. We’ve got the eFiling platform, which is a lot better than the manual system that we had 14, 15 years ago.

But it’s very easy to get things wrong.

What taxpayers really need to weigh up is the cost of getting someone to give you proper advice versus the cost of getting it wrong.

And the costs of getting it wrong are quite hefty at the moment. If you, for example, are sending a tax return late into Sars, there are penalties that could be imposed, and those could be like your late payment penalty of 10% for Vat, it could be administrative penalties if your tax return is late. It could be, for example, a late-payment penalty for provisional tax. And if you get the actual tax number incorrect, there are other penalties that would apply.

If Sars comes along and audits you and finds an error, not only can they get the tax from you, they can impose understatement penalties as well – and that can be up to 200% of the tax that was payable. So it’s hefty penalties that you’re looking at, aside from the interest that’s inevitably charged.

For me, I don’t want to be seen as touting for business for practitioners. But it really has become so complex that it’s actually quite difficult for a layperson to know what their compliance requirements are, and on their own to be able to meet those requirements.

So, if it is affordable my recommendation to people would be to try and get someone who’s going to be reasonably priced for your situation, who will give you proper advice when things go wrong.

MELITTA NGALONKULU: Yasmeen, thank you so much for your time. This has really been insightful.

YASMEEN SULIMAN: Okay, thank you. No problem.

MELITTA NGALONKULU: That was Yasmeen Suliman, an executive at Bowmans, specialising in tax.

In the next episode of the Small Business Conversations, we talk to a well-known entrepreneur, Vusi Thembekwayo, on how to transition from your full-time job to running your own business.

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