This article was originally published on LinkedIn by Tamryn, you can see the original here if you like.
There are only two certain things in the world: death and taxes, each sometimes leading to the other. And while you cannot avoid either one of them, you can prepare for both. I will leave subject of death to those more qualified than I and instead, I would like to provide a (sort-of) simple overview of the three main taxes you will encounter as a small business owner.
1. Income Tax
When conducting a business you are basically required to submit three returns a year for this business that are related to income tax: two provisional returns (based on guesses) and one final return (based on actual, 100% correct figures).
SARS likes to be different and therefore they run their standard tax/financial year from March to February (not Jan-Dec like a calendar year) then, to make things really confusing, they name a year according to when it ends.
So, the “2019 tax year” is the financial year that began on 01 March 2018 and ended on 28 February 2019. We are currently in the 2020 year: it began on 01 March 2019 and will end on 28 February 2020.
Most business registered with the CIPC follow this default – their financial year-end is in February and their reports and taxes follow this pattern.
This means that your very first provisional tax return for the 2020 tax year is due in August 2019. It is for the period March 2019 to February 2020, but since only half the year has happened at that point t is a return based on guesses. You estimate your total income for the year and you estimate your total expenses and then you calculate the tax on the difference. You then pay half of this tax to SARS in August. Payment has to be on or before 31 August in order to not attract a late payment penalty.
Then, in February you will repeat the process with the second provisional return – except this time, eleven months of the year are done so your estimate should be a a lot more accurate. It also needs to be a lot more accurate – if your tax estimate is not within 80% of your final tax amount then you get an “underpayment” Penalty – SARS sure do love their penalties.
The tax year then ends on 28 February and you have a couple of months to close off the accounting for the year and to produce a final set of financial statements. These are then used to submit the third and final tax return for the 2020 tax year. This has to be completed and submitted within 12 months of a year-end – in your case that means before the end of February 2021. The sooner the better though. Tax filing season opens in July of every year, so it’s generally a good idea to submit the tax return sometime between July and December in order to have it done and dusted – but if you are running late with financials, you can submit it as late as 23:55 on the 28th of February 2021.
Whereas the provisional returns are super simple and based on estimates, the information on this return is fairly detailed and needs to be 100% accurate. Your final tax figure for the year is then calculated by SARS and sent to you via an assessment. They then allocate your two provisional tax payments against this final figure. If you paid more than you needed to, they will refund you with interest. If you paid less than you needed to you will need to pay the difference plus interest.
This entire process is then repeated annually for as long as the business is trading.
2. Employees Tax
If you pay an official salary to anyone – including yourself – you need to register the business with SARS for PAYE. The purpose of PAYE is in its name: Pay As You Earn. It is the way that individuals can pay their tax over to SARS monthly instead of being saddled with a massive tax bill once a year that they don’t have the cashflow to pay. As an employer, you will need to deduct PAYE and UIF and pay this over to SARS every month.
If you are the only employee of the business you can avoid this registration for a while by rather paying yourself as a contractor – but don’t forget that you still need to make provision for your own personal taxes. You can do this by submitting provisional returns in your own personal capacity and paying the tax twice a year instead of monthly.
If you do decide to officially employ yourself and other people then the following becomes important:
PAYE is on a sliding scale and varies, it is best to use a payroll program of some sort to calculate it
UIF is 2% of the salary – 1% is paid by the employee (so deducted off their pay) and 1% is paid by the company – over and above their pay. It is capped at R148.77 per month – in other words, salaries larger than R14,877.00 per month never pay more than R148.77 in UIF.
If your salaries exceed R500,000 a year, you are required to add SDL registration to your PAYE set up. SDL is another 1% that the company pays over and above the salaries. The SDL levy is paid to SARS and is used by the government to further skills development in the country. If you provide skills development training for your employees then you can claim this back from the SDL levy.
The EMP return which is the summary of the total PAYE, SDL and UIF due, is due to SARS by the 7th of every month (or the nearest working day). If the 7th is a Saturday, the return will be due on Friday the 6th. Payment needs to accompany the submission. If you pay late, they charge a 10% penalty and they add interest until it is paid.
Please be aware that as an employer, registration with SARS is not your only requirement – you also need to register with the Department of Labour for UIF and for the Compensation of Occupational Injuries & Diseases (COID) levy. We can deal with these on another day.
3. VAT (Value-Added Tax)
VAT is a consumer-paid tax and companies are essentially collection agencies for SARS. It is vital for a business owner to remember that VAT does not belong to the business. The 15% on your invoices belongs entirely to SARS and it is illegal to withhold or incorrectly misrepresent this figure.
You are only legally required to register for VAT if your sales (total sales, not profit) reach or exceed R1 million in a twelve month period. If they remain under R1 million then you do not have to register. You can opt for voluntary registration if your sales exceed R50,000 in a year.
Personally, I do not recommend voluntary registration at all unless you are a position where you cannot sell to a mega customer because they only deal with VAT Vendors. The administrative and cashflow burdens surrounding VAT is very rarely worth a voluntary registration unless your income depends on having a VAT number.
If it does, or if you know you are going to exceed the R1 million threshold:
VAT returns are due to SARS every two months. You choose your periods, so you are either in group A: Jan/Feb, Mar/Ap, May/Jun etc or you are in group B: Feb/Mar, Apr/May, Jun/Jul etc.
If you are in Group A, then your first return for a financial year is the one for March/April. This will be due in May. Officially, the return is due (with payment) on the 25th of May, but, if you submit the return via efiling SARS gives an extension to the last working day of the month. As an example and using dates from 2019: the return due for the period March/April is officially due on the 25th of May, but you have until the 31st to submit them on efiling because the 31st is a Friday. But, if you are in Group B, then next month the return for April/May is due on the 25th of June and you can’t wait until 30 June to submit – you will have to submit them by the 28th because the 30th is a Sunday.
To make sure you are never late, make very sure you know your group and keep good track of deadlines and working days in a month!
VAT is calculated on what is referred to as the “Invoice” or “Accrual” basis. This is opposed to the “Cash” basis. What this means in English, is that SARS requires you to calculate your VAT based on invoice dates NOT payment dates. This leads to one of the biggest challenges involved in VAT planning: the possible negative effect on cash flow.
If you invoiced R100,000 in March/April, you have to pay SARS R15,000 VAT in May – it is important to note that this is due to SARS regardless of whether the R115,000 has been paid to you or not. So, if you have late-paying clients you will have to produce this R15,000 to pay SARS from your own reserves. There is no legal way to delay this payment and SARS will not care that your clients have not paid you.
You can, of course, claim the VAT on some of your expenses (not all!) and this does reduce the amount due, but the only industry where this results in a VAT refund is one in which your principle sales item is zero-rated. If you are charging the normal 15% on your sales and if your business is trading healthily, then you should always result in an amount due to SARS.
It is important to remember that while SARS is not “out to get you” like many believe, they do have one purpose: collect what belongs to the government. Their primary function is to protect the government’s interest – not yours. So, while they will not purposely try to break you, they also will not bend the rules to help you. You need to be aware of your legal obligations and make sure that you have made provisions to comply with them. If you do your bit, then SARS will come to the party and help you – but you have to do your bit first.
All three of the taxes above need accurate financial reports. Good bookkeeping – done consistently – is essential for these processes to go smoothly, so do be sure to make them a priority. If you are outsourcing the function, investigate your chosen firm thoroughly. A good bookkeeper or accountant does not mind being subjected to an inquisition regarding their work because they know they can provide answers. If you are hiring someone in-house to look after the accounting function, make sure that the person vetting them knows what they are doing and does a thorough job of testing competency and references.
Cash is the lifeblood of your business. Do not neglect the things that affect your cashflow: financial records, budgets and taxes – make sure you understand them and have them all in order.