Fatal Mistakes for Small Business
Let’s face it, business is by no means child’s play and mistakes can be costly and detrimental. But then there are those mistakes that can be absolutely fatal to your business. In this article I address 5 tax mistakes that could proof fatal to otherwise successful businesses.
Over the last number of years much has been done to give small businesses some preferential treatment, which include immediate write-offs for equipment used in the business and special treatment when it comes to depreciation and wear-and-tear allowances, as well as efforts to simplify tax concessions available.
Despite this preferential treatment small businesses still find themselves in hot water because their income tax affairs are not in order.
So, what does trouble look like and how do we prevent it?
- Mixing business expenses with personal expenses
For small businesses is if often difficult to distinguish between business and personal expenses. It is key to remember that there is one simple rule to determine if expenses are for business purpose and as such tax deductible: expenses must be incurred in production of income, and not of a capital nature.
Also keep in mind that SARS scrutinises entertainment, travel and accommodation expenses so be very sure these costs were incurred for business and that you retain all proof if you wish to claim.
Make sure that you have separate bank accounts, one for the business where business income is received and where business expenses are paid from. The other bank account is for your personal income such as salary, and personal expenses.
Also ensure you have all necessary documentation available as proof, i.e. invoices, receipts, etc.
- Failure to register for VAT
Many small businesses mistakenly assume that they only become liable for VAT when they register for VAT – not true. Should you not register for VAT when you are due to do so and SARS deems you a vendor SARS will levy VAT, penalties and interest from the date you were supposed to have registered. And because you were not registered for VAT at the time you will not be in a position to claim for the input tax. Horror upon horror.
Know when to register for VAT and enlist the services of your bookkeeper, accountant, tax practitioner or a professional for assistance.
There are 2 ways in which to register for VAT, namely:
- Voluntary VAT registration – this is for business that has taxable supplies of less than R1 million but has exceeded R50,000 in the preceding 12 months.
- Compulsory VAT registration – this is for any business that exceeds R1 million turnover in any consecutive 12-month period
For more information on VAT registration please visit the SARS site
- Failure to supply SARS with Supporting documents for verification or audit
When a business submits its tax returns to SARS, the filed return may be selected for verification or audit. SARS conducts audits by inspecting the tax payers’ financial and accounting records, including supporting documentation.
If you are notified of a verification or audit by SARS ensure to supply the requested documents within 21 working days of the date of the SARS notification, in my experience sooner is better. Some of the documents typically requested may include the following:
- Bank statements
- Travel logbooks
- Receipts of medical expenses paid by the taxpayer
- Medical certificates
- Retirement annuity certificates
- Financial statements
- VAT schedules
- Valid tax invoices
- Documents relating to income and deductions
Remember that as the taxpayer, the business is obliged to retain all relevant document for 5 years after assessment. My recommendation is that you keep electronic copies in the cloud and if you’re are able to do so, retain for longer than 5 years. In the last year I have dealt with n number of taxpayers that had to dig up information long past the 5-year mark.
- Missing deadlines
Missing the deadline submissions for tax returns and other statutory returns can result in penalties of up to 200%. Businesses that miss the SARS deadlines will also not be able to obtain tax clearance certificates.
So why do we miss deadlines?
- We may not have all the required documents requested by SARS
- We are unaware of the deadlines
- We treat tax compliance as a minor issue that can be attended to at a later stage.
Retain all relevant documents that may be called on by SARS. Familiarise yourself with the different deadlines applicable to your business and diarise action dates for the responsible parties. Remember that as the business owner the buck stops with you so even if you outsource the relevant actions and tasks, task yourself to follow up and obtain confirmation of SARS status on a regular basis.
- Using VAT or PAYE as cashflow
Not paying SARS on time will proof a very costly mistake, with late submission penalties and interest charged. Many small businesses indicate cashflow to be one of the biggest challenges in their business and not paying SARS is guaranteed to worsen the situation.
When I assist business owners to optimise their businesses one of the first recommendations, I make is to ensure a separate bank account is available. This account is to hold any provisions to be paid at a later stage, including VAT & PAYE. Ensure that you have monthly management accounts drafted which will indicate the tax position for the month and then ensure to transfer the necessary funds to the provision account until such time that the funds are to be paid to SARS or other parties. Do not dip into these funds for cashflow, rather apply for short term loans or reassess the operational expenses.
I hope that the information in the article sets you on a path to better informed decisions when it comes to the tax affairs of your business. Don’t let tax non-compliance be the reason your business suffers.