I presented a short talk to a group of entrepreneurs a little while back. My opening question to them involved finding out what vehicle they used to operate their business. The overwhelming majority – in fact every one of them – used a company or close corporation to trade with. In addition, none of them used any of the alternative tax options such as Small Business Corporations Tax or Turnover Tax. I asked the question as to WHY these options were employed and the consensus was that “it was the best thing to do” … but is it really?
Choosing your trading vehicle and tax framework is an important matter. No two businesses and business owners are in the same position – and therefore consideration needs to be given to personal circumstances in order to make an informed decision. I also believe that this decision needs to be taken as early as possible in your entrepreneurial journey because sometimes the decisions taken in the beginning are difficult to be reversed later without additional administration and costs.
To simplify matters, I am going to look at some of the high-level strengths and weaknesses of doing business in your personal name as a sole proprietor or partnership versus that of a company. (I will ignore Trusts etc for these purposes – but they do have their place).
Ownership: Sole prop / Partnership
- Protection from Creditors – No
- High administrative burden – No
- Tax advantages – Yes
- Protection from Creditors – Yes (Limited)
- High administrative burden – Yes
- Tax advantages – Yes
- Individual – Yes
- Companies – No
- SBC – No
- Turnover Tax – Yes
- Individual – No
- Companies – Yes
- SBC – Yes
- Turnover Tax – Yes
In short, Companies offer some protection from creditors (but if you have signed personal surety that protection could be nullified?) Both forms of ownership can also have tax benefits over the other – it just depends on your circumstances.
The crux of the matter here is matching your selected tax framework to your business. In broad terms, the following tax frameworks could be applicable:
- Personal income tax : The sliding tax scales issued by SARS which taxes net income received by individuals
- Company tax : Taxable income is taxed at 28%
- Small Business Corporation Tax : Taxable Income is taxed on a sliding scale from 0% to 28%
- Turnover tax : Tax is levied on the turnover of the enterprise on a sliding scale. It ignores any costs or expenses incurred
To illustrate the point of choosing a suitable framework please download the example of the implication of different structures and taxes here. The assumption is that the business generates R1m in turnover and a profit of R600k before paying any owner salaries. Owners are then paid a salary of R250k and the remaining profit is distributed via dividends.
As one can see, the effective tax rate that is paid varies from 14% to 28% depending on the structure that is used. Now, this could easily be optimised by taking the time out at the BEGINNING of the enterprises existence as opposed to the end. Had this business elected to use turnover tax upon inception – irrespective of the vehicle (i.e. company vs sole prop) it would have saved at least R25,000.
There are other considerations to take into account – and certain constraints which may prohibit registration for certain types of tax frameworks and businesses – but my advice is to consult a good tax accountant PRIOR to setting up your business (and then regularly thereafter to review the position) to ensure that you are using an optimal structure for your particular circumstances.
If you already have an existing business, fear not for the proverbial horse has not necessarily bolted. You may elect to register for a different tax framework at the beginning of the next fiscal year provided you meet the requirements of that tax framework.
Reimagine The Use Of Technology
The phenomenon of ‘big data’ is rapidly catching up with the world of tax.
Get Your Small Business VAT-Ready Without The Headache
On 1 April 2018, Value-Added Tax (VAT) will increase for the first time in 25 years, from 14% to 15%. Viresh Harduth, Vice President: New Customer Acquisition (Start up and Small Business) at Sage Africa & Middle East, guides this transition.
If you’re a small business owner, it’s likely that you’ve never had to deal with a change in the VAT rate before and don’t know where to start to get your systems and processes VAT-ready, without impacting your cash flow and operations.
Here are a few tips to get your small business VAT-ready, come 1 April:
Test your operation
If you are a small business that still uses manual processes like spreadsheets to calculate and record VAT, consider creating dummy sheets and invoices to ensure you are processing the additional VAT correctly and that you can process transactions at 14% on 31 March and 15% on 1 April.
Also consider that, if a customer returns a product on 1 April that they bought on 31 March, it will need to be refunded at the old VAT rate.
NOTE: From 1 April, all receipts, invoices, quotes, adverts, credit and debit notes must reflect the new rate, so test your systems beforehand to make sure there aren’t any errors.
Understand time of supply
The transaction date, or time of supply, is probably the biggest consideration for businesses when applying VAT to sales. The VAT Act stipulates that the time of supply will be either when an invoice is issued or when payment is received – whichever happens first.
For example, if you invoice for a sale on 31 March but are only paid on 2 April, the VAT rate of 14% will apply. If you receive payment on 1 April but have not yet invoiced for the sale, then VAT should be charged at 15%.
NOTE: Consult the VAT Act for rate-specific rules applicable to contracts and supplies starting before and ending on or after 1 April.
Automate where possible
Cloud-based, automated accounting solutions, like Sage One, will be VAT ready, come 1 April. Businesses using these solutions don’t have to worry about staying on top of the different VAT rates because the system will automatically generate the correct VAT invoice, quote and debit or credit note.
NOTE: All transactions are stored and readily accessible in the cloud, from anywhere, ensuring businesses are compliant with SARS and VAT laws.
Educate your colleagues
It’s crucial that your team members know how to raise invoices and credit notes that are processed before and after 1 April, and how to process refunds for sales that occurred before this date, as these will attract different VAT rates.
Adjust your pricing
The VAT Act states that displayed pricing and adverts must include VAT (unless the product is zero-rated). Some small businesses might want to close shop for the day to adjust their shelf and online pricing to reflect the new rate in time for the new business week on Monday.
However, those that are unable to do this can display a notice at the till point, stating that prices do not include VAT at the new rate and will be adjusted at the tills.
NOTE: This grace period is only in place until 31 May, after which all pricing must include the new rate.
Check your own quotes and invoices
Any quote or invoice you receive for stock purchased after 1 April should reflect the new VAT rate. You’ll need to submit this documentation when claiming input tax. If your supplier does not calculate VAT correctly, you will be liable for the shortfall, which could impact your cash flow.
NOTE: You will also incur penalties if you under- or over-declare VAT on your VAT201 return – another reason why automating the accounting process is a good idea.
Get reporting ready
The next VAT201 return you submit to SARS will be more complicated because you will need to calculate input and output tax at different rates, not to mention the apportionment rate that will need to be calculated for contracts and services taking place before and after 1 April.
NOTE: Again, automated solutions can take care of this for you but, if you’re using manual processes, you might need to consult an accountant to make sure you’re not over or under reporting VAT on your reconciliations.
Complying with the new VAT rate is a massive administrative task for businesses of all sizes – and they don’t have much time to prepare. To find out how Sage can help your business with compliance, click here.
Sage Reports On How Payroll Compliance Is To Come Under Scrutiny
Expect the South African Revenue Service (SARS) to clamp down on non-compliant business and personal taxpayers as government struggles to fill a large budget deficit says Rob Cooper, tax expert and Director of Legislation at Sage.
Ensure that your payroll is fully compliant with the laws and regulations around collection of PAYE, as government looks to plug revenue holes.
While you may have previously gotten away with non-compliance, whether unwittingly or otherwise, the law is tightening around payroll compliance and you need to be prepared. Government is focused on acquiring funding for infrastructure investment and social spending, but what does this mean for your business?
Tax compliance ruled with a firmer hand
Accounting for more than a third of tax revenue, personal income tax is the single largest contributor to fiscal revenue. SARS has done a good job over the years of bringing employers into the tax net and catching those that don’t comply with the tax regulations and legislation.
Those few companies that are not in full compliance can expect to see the tax authority take an even more robust approach to enforcing compliance.
Timely and accurate submissions keep you in the clear
To remain compliant, businesses must ensure that they register all employees for tax, declare the correct earnings for all employees and include correct calculations of other earnings, deductions (such as PAYE and UIF), and contributions (such as retirement funding or UIF contributions) in their payroll. They must also make sure that annual returns are filed and submitted promptly and accurately.
The risks of getting it wrong include:
- Interest or fines by authorities (SARS, department of labour, a labour court etc.)
- Imprisonment in cases of fraud or extreme negligence.
What’s more, compliance is complicated by annual changes in payroll legislative requirements.
Automation solves compliance challenges
Because compliance is complex and the risks of non-compliance are high, even smaller South African businesses can no longer rely on spreadsheets and other manual methods to do their payroll calculations and file returns.
Automated solutions are becoming more essential for keeping reliable records and performing accurate payroll calculations.
Payroll automation software — with solutions available for businesses from start-ups to medium-sized companies and larger enterprises — takes care of calculating the complex formulas for the various deductions, generating compliance reports, and keeping accurate records.
That makes it easier to perform accurate calculations, file submissions on time and generate reports and electronic payslips.
Eliminate manual paperwork
Payroll software takes the pain out of compliance, allowing you to focus your energy on strategy, customers, and employee engagement rather than on red-tape.
While mistakes in record keeping and compliance can result in punitive penalties and hurt the company’s brand, an efficient payroll system enhances staff morale, helps to reduce the risks of fraud, and boosts an organisation’s reputation.
It is a worthwhile investment in the business and a foundational element of good governance and sound financial control.
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