Perhaps one of the biggest challenges faced by South African small businesses is understanding and dealing with SARS. The key, regardless of what type of business you are running, is knowledge. Knowledge of SARS’ practices and requirements, as well as the belief on your part that SARS wants small businesses to succeed. Communication is the other important key. Communicate with them and they will work with you to keep your business going.
Darlene Menzies, CEO of SMEasy, and Kantha Naicker, Managing Director of Evolve Accounting, provide expert advice on understanding and dealing with SARS as small business owners.
Many entrepreneurs believe that SARS is the bogeyman and they also tend to feel as if they are the only business facing challenges with them. It’s this thinking that breeds a secrecy mentality and hinders transparent and open communication with SARS when you find yourself in difficulty. Although complying with tax regulations and legislature can be daunting, understanding that you are not the first or last company to deal with these challenges is a huge comfort.
Using VAT or PAYE as cash flow
When it comes to SARS the best piece of advice to give small business owners is not to use your VAT and PAYE money as part of your cash flow: this is a very reckless way of running your business. Many entrepreneurs do end up using VAT and PAYE money to pay staff costs and crucial month-end expenses. This is a very common and irresponsible business practice. Heavy penalties and interest are imposed on late submission of returns, as well as late payments. Interest on VAT is levied at a prescribed monthly rate of 10.5% on all amounts due, while the penalty is levied at a prescribed rate of 10%. The same applies to PAYE and UIF, but interest of 10.5% is levied on a daily basis and the penalty is set at 10%. When dealing with late payments for PAYE or UIF, SARS can also impose an additional penalty not exceeding twice the total of the outstanding amount on your business for failing to pay the relevant amount with the intent to evade your obligation. These penalties are very onerous and can easily sink a business. The bottom line is: never use SARS money to survive; it is a very expensive and dangerous business strategy.
What if you have used SARS money to survive?
In this situation, avoidance is the worst strategy you can embark upon. The first step you need to take is to make contact with SARS without delay, either via their contact centre on 0800 00 SARS (7277) or by visiting your nearest branch. Like any creditor, the key is communication; by communicating clearly and discussing your financial situation openly you make it clear that you are not evading your tax obligations. In certain circumstances, you can reach an agreement with SARS to defer your tax debt for later payment or for payment by instalment. The key thing to bear in mind in dealing with SARS is that it is in their best interest for your business to remain afloat because it’s the only way they can recover their money. Work with them to find a viable solution.
How do you avoid getting yourself into the same situation in the future?
The only way to avoid getting into debt with SARS in the future is to focus on your cash flow management. It is crucial to watch your cash flow carefully, to manage it closely and efficiently. You need to check your bank account and track the movement of the money in your business daily. Be aware of what money is due to come in and go out so you can make plans well in advance if you are going to run out of money at any time. Upon reflection on the heavy penalties and interests levied by SARS, it is crucial to recognise the signs that you are getting into the same situation and make appropriate plans to resolve it. Hoping you can trade your way through it is the worst possible approach. Investigate accessing finance, understanding that using SARS money is a very expensive way of funding your business. There are far cheaper ways to raise working capital. Be creative in managing your cash flow, reduce expenses where possible and consider offering discounts to your customers if they pay you sooner.
While it may be difficult for some entrepreneurs to believe, the reality is that SARS really does wants to see small businesses succeed. They don’t want to see jobs lost or liquidations occur. Remember to communicate, rather than avoid, SARS if you have fallen behind on payments and, most importantly, recognise that using SARS money is a very expensive and reckless way to run your business and should be avoided at all costs.
* by Darlene Menzies and Kantha Naicker. Menzies is founder and CEO of SMEasy and Naicker is Managing Director of Evolve Accounting.