In this article, I’ll be going over the biggest tax mistakes that I see small business owners in South Africa make that not only cost them time but also money.
Now I completely understand that if you’re reading this article chances are you’re not an accountant or tax practitioner and though your intentions might be good you don’t necessarily know everything to do when it comes to your taxes well.
This article will highlight some of the common things not to do as a new business owner or as a business owner in general from a tax perspective. That said, let’s get started.
1. Not Separating Personal and Business Bank Accounts
The first mistake that I see new business owners make is not separating their personal bank account and their business bank account.
It is so important to do this so that you can clearly keep track of all of your business income and expenses. After all, you want to make sure that you write off as many business tax deductions as possible to save money, and in order to do that, you need to have organized records.
Mostly, I see new business owners operating from their personal bank accounts which just creates a big mess at tax time.
More importantly for you as the business owner, it would be nearly impossible to know where your business stands financially without separating your business and personal finances.
After registering your business with the CIPC, you can go to any of the major South African banks to open a business account. Then all income and expenses related to your business must be done through your business account.
2. Not Knowing What Taxes to Pay and When
It’s important to make sure you know exactly what taxes you need to pay, and when. SARS waits for no man, and if a deadline is missed even by a minute, you start incurring penalties and interest.
Taxes are collected in various ways. As a business owner, this could mean completing Pay-As-You-Earn (PAYE), Skills Development Levy (SDL), Unemployment Insurance Fund (UIF), Value-Added-Tax (VAT), Dividend Tax, and Corporate Income Tax.
So, to make it easy, here’s a summary of when tax submissions and payments are due:
- Payroll taxes are due monthly before the 7th – or earlier if the 7th falls on a weekend or public holiday.
- VAT – this is due either monthly, bi-monthly, twice a year, or annually, depending on your business cycle and registration with SARS, and is due by the 25th.
- Provisional tax – due every 6 months from financial year-end.
- Dividend tax – due before the last day of the month following the month in which the dividend was paid.
Tax can become complex and burdensome but…
Remember that by submitting your tax payments timeously and accurately, you can ensure a hassle-free, smooth submission to SARS. Insufficient payments and/or underestimation of taxable income may lead to you being charged with penalties and interest.
If you don’t make those tax payments, SARS is going to assess big penalties and interest on the tax that you owe and this can easily be thousands (or even millions) of rands. In extreme cases, you may even go to jail.
3. Inaccurate Accounting Information
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 that 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.
Steps you should take to avoid the above mistake:
- Employ a competent accounting firm to help you 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 of 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 service-based business may not require a stock-take, it may require the establishment of an agreed method for recognizing fee income.
Ultimately, I highly recommend partnering with a reputable accounting firm to help and guide you through all this.
4. Failure to Obtain Valid Tax Invoices
Small business owners often fail to secure valid tax invoices for their VAT input claims.
Input VAT should have a neutral impact on a company, but if SARS disallows specific claims, then the input VAT becomes a cost, and that will reduce your company’s profitability.
The VAT Act specifies that the following details should appear on an invoice for any amount greater than R5000:
-The word “tax invoice” or “VAT invoice” or “invoice”,
-The name, address, and VAT registration number of the supplier,
-The name, address and, where the recipient is a registered vendor,
-the VAT registration number of the recipient,
-The unique number of the invoice, and
-An accurate description of the goods or services supplied, and the volume or quantity of goods or services provided.
For invoices of less than R5000, only the supplier’s information needs to be included on the invoice and not the recipient’s details. Here the supplier need not specify the quantity of goods or services supplied.
5. Keeping Some of Your Income “off the books”
It is your responsibility to ensure that your disclosures to SARS are accurate. Non-disclosure of income, whether accidental or deliberate, can result in severe penalties ranging from 10%-150% on the total understatement.
Keep in mind that if you use a tax practitioner, it’s still your responsibility to give them accurate and complete information.
6. Not Taking Ownership of the Business Tax
Owners of small to medium businesses often “leave tax to the bookkeeper/accountant”, without taking ownership of their fiscal responsibilities.
It is vital for business owners to be aware of tax submission deadlines and to ensure that tax is paid within these prescribed deadlines. The communication line between the accountant and the business owner should be crystal clear and always open for the business owner to understand his business holistically and taxes.
A lot of business owners should always be open so that the cost of these mistakes can be high especially for elements such as the late submission and payment of 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.
To prevent the above from occurring, you 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.
7. Not Understanding or Knowing the Qualifications of the Accountant or Bookkeeper You Entrust With Your Company Books
Appointing an accountant is one of the most crucial decisions that a business owner will ever make. Selecting one requires thorough research.
The most prevalent problem I see many SMEs make is mainly using pricing or cost as the only criteria for selecting an accountant or accounting firm while neglecting other significantly important factors such as:
- Qualifications of the Accounting Firm or Accountant – Do they belong to the accounting body
- Accounting Systems that the firm uses – (This is key as many companies think their financial information is being recorded yet not being done, especially after making a wrong appointment
- How many team members the firm has
- References on who to appoint
- Valid client reviews or testimonials, and etc.
This mistake is bigger than you may think because choosing the wrong accountant or accounting firm today can cost you a lot of stress, time, and money ESPECIALLY in the long term. You want to choose wisely.
So those are some of the common mistakes business owners typically make. To avoid these mistakes listed above (and even those not listed in this article), I highly recommend you hire a reputable accounting firm in South Africa as that will significantly save you the stress, time, and money you could otherwise incur over time.