Tax Mistakes made by many SME Businesses
Tax nightmares among owner-managed businesses and SME’s are prolonged and expensive. Particularly if pertaining 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 best limit the potential for these tax mistakes from arising.
The accuracy of the underlying accounting information and supporting documentation is directly critical to the integrity on the taxpayer’s income tax return. With regards to SMEs, this integrity is often queried; and is also normally the result of a lean accounting function; and confusion in distinguishing between the financial affairs of the business and the company owner.
SARS tax auditors are focused first on testing the reliability of records and accounting books. For example, they will likely review cash accounting records for unusually large or ad hoc payments, on the idea that these often represent private expenses; which were 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 keep proof of all income and expenditure in addition to maintaining business documentation in a particular format, for instance, VAT invoices.
Steps which a business proprietor should choose to steer clear of the above issues arising include getting a competent bookkeeper to maintain accurate accounting records and supporting documentation.
Company owners should make sure that they have a consistent list of accounts to which income and expenses will be posted; and it is a good idea to make use of control accounts which can be reconciled monthly to customer and supplier statements. For instance a VAT control account that is reconciled by SARS accounting statement. These are available from SARS on requests.
Be sure you establish really clear guidelines for how your accounting will treat the business owners’ private expenses and assure these are posted to a shareholder loan account and not to a business account.
Another necessary guideline to ascertain and follow would be the recognition of accounting revenue or expenses for VAT and tax purposes; which SARS will approve. This would usually include income or profit due to subscription or retainer profits made from long-term building projects or agency businesses.
Where necessary ensure there’s a good understanding of important tax rulings for complex domestic businesses or businesses with considerable cross border transactions;
Should the business hold inventory, ensure that there are clear procedures in place for counting and pricing regular stock-takes
This list of steps seriously isn’t exhaustive, and may vary depending on the kind of business. While a services business would possibly not require a stock-take, it might just require the establishment of the agreed way for recognising fee income.
Problems often arise when business owners of small to medium sized businesses leave the accounting and tax to the bookkeeper without taking ownership of such duties; or even overseeing them. This remains part of the owner’s fiscal responsibilities.
It is really essential for people who run businesses to be familiar with tax submission deadlines; and to ensure that tax is paid within these prescribed deadlines; which cannot be left hoping the accountant or bookkeeper is going to do it. Mistakes here are often very costly; particularly on late submissions and payments of provisional income tax payment or monthly PAYE payments.
Tax payments are often times the first thing to put off when cash flow is under pressure; since direct expenses take preference. If this persists, expensive non deductible overdue penalties and interest accumulate quickly until the outstanding tax capital amount is paid, particularly as payments are usually allocated by SARS to interest and penalties first before settling the tax capital amount due.
In order to prevent the above mentioned from occurring, business owners ought to include direct (income tax) and indirect (VAT, PAYE) into all monthly cash flow plans. It is really viable to set-up a different bank account into which indirect ‘withholding’ taxes can be transferred upon withholding, especially for PAYE and VAT.
Make certain you include income tax in monthly and annual business planning forecasts to be certain that any income tax cash can be provided for; and set aside in a separate bank account for this purpose if possible.
It is a sound practise to contract an external tax advisor to perform an annual tax check on your business. This way you’re certain that that you are tax compliant and up to date with any changes linked to tax for example travel allowances or PAYE.