By Pias Murinye
There is a drive to encourage emerging business to formalise their businesses by registering their companies with CIPC in the case of South Africa. This enables companies to open bank accounts, look more professional and attract more business.
However little is explained to these entrepreneurs about the TAX responsibilities that come with registered companies. In this article, I will shade more light on how tax affect small businesses and how small businesses can avoid mistakes that can cripple the future of their operations.
I will be basing this TAX TALK on a South African point of view, articulating the SA tax laws in layman terms. I will categorise my article into common tax types relevant to small businesses in South Africa. Please note that I will note delve into individual tax which I know most people might be interested in.
In as much as individual tax is closely related to company taxes, I will leave it for another day as it is a handful on its own. I will look into Income Tax and Value Added Tax (VAT). I will discuss PAYE in my next article together with individual tax.
Soon after registering a company, one will be issued with the company registration number together with Income tax registration number.
This means the company is automatically registered with the South African Revenue Authority and is liable for income tax. Many companies get to trade for years without bothering to pay income tax.
The danger with this approach comes when tax history or profile of the company is now needed for different reasons:
1. A company’s tax profile is always needed when applying for business finance which many serious businesses will need at some point;
2. A Tax profile may be required if one decide to sell his/her business;
3. A Tax profile may be required by potential investors before they can invest in your business;
4. A tax profile is a prerequisite for any tender application; Some potential customers will request the company’s tax profile before they can do business with you;
5. SARS officials can turn up at your doorsteps unannounced and will check your tax profile and you do not need this to happen to your business when not prepared.
The problem comes when the above situations or many more that I did not mention, force you to update your tax status. Remember SARS will know exactly when your business was registered.
Many companies have gone bankrupt trying to update their tax profiles after years of non-compliance.
The problem with delayed submission of tax information is that you will find yourself with a debt of more than one year to pay, and at 28% of annual profit, income tax for one year is a handful and doubling, tripling or quadrupling it can be a disaster to any company’s cash-flow.
To add salt to that wound, any late submission of tax will attract a penalty of 10% of the amount payable.
As if that is not enough, SARS also charge interest at an average of 10.25% per annum compounded monthly from the day the submission was supposed to be done until the day the debt is fully paid.
And remember, all registered companies in SA are registered for income tax and are liable to pay income tax. To be on the safe side, consult your accountant and be compliant before it is too late.
Value Added Tax (VAT)
This is an interesting type of tax. VAT was designed to benefit businesses who decide to register for it, however a lot of businesses have registered for VAT without proper understanding of how it works and have ended up in serious cash-flow problems.
Companies with a turnover of more than one million per year are required by law to register for VAT.
Companies with a turnover of less than one million a year can choose to register for VAT if their annual turnover exceeds R50 000, this is called voluntary registration.
VAT in SA is 15% of your selling price, simply meaning that if you are selling your products for R100 before registering for VAT, after registration you must sell the same product for R115.
Advantages of VAT Registration
Big businesses prefer to deal with VAT registered companies as it allows them to save on their purchases, this means a VAT registered company can attract more and better business than one which is not registered.
A registered business will be able to claim any VAT it pays for any business purchases from SARS meaning that the eventually the cost of running the business will be less than that of an unregistered company.
VAT registered Companies appear more professional and established than non-registered ones
Capital Intensive businesses will benefit even more by saving 15% of their capital expenditure through VAT.
Disadvantages of VAT
Due to the extra 15% on your selling price, your products may appear more expensive and they will actually be expensive to companies not registered for VAT and may make your business less competitive.
In a bid to be competitive some businesses reduce their selling prices to accommodate the extra 15% without scaring away customers and in the process depleting their profitability and it’s a danger to the company’s cash-flow and overall profitability.
Without proper advice and proper cash-flow management VAT can bankrupt a company as payments are to be done to SARS at least once every two months.
Having said what I said, registering for VAT is a good thing if done with a better understanding and again I say, before you register for VAT, please consult your accountant or tax practitioner for advice.
I will also discourage those in the transport business to register for VAT for reason I cannot explain in this article due to space constraints.
Please don’t miss the next edition of the TAX TALK WITH PIAS as I will be discussing PAYE and Individual Tax Returns.
For any tax and accounting related question please contact the writer on 0710870824, email firstname.lastname@example.org or visit our website at www.helbon.co.za.
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