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SME’s
Common pitfalls that lead to tax nightmares
Falling foul of
the penalty provisions of the various tax acts can prove extremely
costly. This is particularly true in the field of small to medium
sized businesses where the impact of cash flow can signal the
demise of a business.
Although it is the
avowed intention of SARS to audit every taxpayer at least once in
any five-year period, the timing of such audits cannot be
predicted. Usually, audits are triggered by claims for deduction
of significant amounts in the area of VAT or Income Tax. However,
consistent late payment of amounts due in respect of those taxes
and PAYE can also lead to an audit.
Once a SARS auditor gets a foot in the door via the
aforesaid triggers, the possibility of detecting other
infringements is magnified. For that reason, it is essential that
the small businessperson is proactive in defining areas where
controls may be implemented and ensuring that accurate accounting
records are maintained and up to date.
In devising such a plan, it is essential that a competent
accounting professional and tax practitioner is consulted.
Some common areas that need attention are:
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Ensuring
that all invoices, for which a VAT deduction is claimed,
comply with the qualities of a tax invoice. Often, we find
that the invoice is made out to the business owner or a member
of a Close Corporation. If detected this will result in a
penalty being imposed and interest on that penalty being
back-dated to the date of the infringement. The relative
expense could also be disallowed as a deduction for income tax
purposes.
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The
intermingling of personal with business expenses. Examples
are:
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the
domestic electricity account being treated as a business
expense
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bond
repayments being classified as rent
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life
assurance premiums being claimed as insurance
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VAT
on these items being claimed in the VAT return
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An
external accountant will only detect such errors after they
have occurred. Therefore, it is best to lay down rules to
ensure that those responsible for submitting returns are aware
of which recurring expenses are of a personal nature and which
are business and ensuring that supporting documentation for
the latter is in the name of the business.
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Meeting
submission and payment deadlines is essential – ensure that
your staff is aware of those deadlines and make sure that you,
as the business owner, personally take ownership of achieving
those targets.
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Using
amounts of VAT or PAYE that have been collected on behalf of
SARS to meet other pressing expenses, whether of a business or
private nature, is fraudulent. Failing to pay these amounts
over to SARS on due date because there are inadequate funds in
the bank can result in criminal sanction the severity of which
may be determined by how those funds have been used. Keep SARS
funds separate from your personal and business funds.
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Remember
that the use of business assets attract a liability for fringe
benefits tax in the hands of the recipient. That same
transaction may also result in an under-declaration of VAT.
For example, a grocery owner draws his monthly domestic stocks
from the business without making any record in the books. In
this case he is reducing the businesses liability to income
tax and to VAT. In the former case, the reduction in stock
levels will result in lower profits and, in the latter, he
will have claimed VAT on the initial purchase of the goods
without paying over VAT when he withdraws the good from stock.
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