There is a fundamental difference between business and personal finances when it comes to taxes.
Start you off on the right track for the next tax season year with these financial faux pas that are sometimes overlooked by small businesses.
1. Not keeping financial records up-to-date
This is the number-one mistake small-business owners make and also the most important to remedy. While it seems logical to keep records accurate, it is easier said than done.
No one wants to pour over accounts payable, receivables and cashflow at the end of a long day, which is why this important part of the business is often overlooked.
One way to help manage this is to employ financial tools that do the work for you. The cloud has opened up a myriad of applications that can “speak to one another” and automate back-end services.
Additionally, the anytime, anywhere ability of cloud computing and smartphones makes it so you can update your books on the go.
2. Skipping the annual budgeting and financial forecasting
If you don’t have something to measure against, how will you know if you are on track? Data is knowledge, so create a simple plan based on your business insights and knowledge of market trends to forecast ahead and plan accordingly.
3. Not meeting with an accounting professional regularly
Remove some of the burden by working regularly with an accounting professional and use their expertise to your benefit.
It’s recommended that business owners meet with their accounting counterpart at least once per month to maintain good financial standing.
4. Misclassification of employees
This issue is becoming increasingly important as more businesses outsource jobs to contractors.
Misclassification can result PAYE and tax discrepancies. Play it safe and classify accordingly.
5. Mixing personal with business expenses
Small businesses are afforded tax breaks and write offs that are typically unavailable to the general population. These include home office deductions, mileage, some business meals, utilities and travel expenses.
Make sure you are taking advantage of these and not leaving money on the table, but be careful not to over indulge, as excessive deductions are one of the biggest triggers of an audit.
Good financial health is something that needs to be fostered 365 days a year. Avoid the financial “sins” and use the proper financial structures to keep your company on the right path.
Silver Linings For Smaller Businesses In Budget 2018
As expected, the Finance Minister and Treasury have proposed some tough measures to address South Africa’s tax collection shortfall, growing budget deficit, and new spending priorities in the 2018 Budget Speech. Sage software can ensure your business remains compliant through these upcoming changes.
Higher VAT, fuel levies and import duties on luxury goods will crimp consumer spending, which could be bad news for SMEs, but we are pleased that the Finance Minister has raised his GDP growth projections and proposed interventions to help grow South African SMEs.
Government is taking steps to restore fiscal credibility, rein in spending, and hold off another credit ratings downgrade, such as:
Growth, reviewed competition policy and improved market access
The hopes and concerns of entrepreneurs and SMEs were extensively covered, including how low market access and high barriers to entry are constraining the growth of the country’s SMEs.
While government will take action against anti-competitive behaviour that harms these businesses, big businesses should also play a constructive role in nurturing the growth of SMEs through mentoring and partnership.
An increase in SME funding
The Departments of Small Businesses and Science & Technology and the National Treasury developing a R2,1 billion fund to benefit SMEs during the early start-up phase is good news, but it’s important that the funding is spent efficiently and productively.
We’d like to hear more details about how government will choose to allocate this money.
A shift in public procurement participation
Government using public procurement to support Black Economic Empowerment, industrialisation and development of SMEs see its billions of rand in procurement spend used to empower SME owners — we look forward to more details about how government will increase participation of small and micro businesses in procurement opportunities.
It’s also critical that government follows through on its promise to pay small businesses within 30 days of invoicing. Cash flow is a major challenge for small businesses and few of them can afford to wait three to six months for payment on a big project.
The rise in the VAT rate
The VAT hike will take some money out of people’s pockets, but will probably have less impact on business confidence than higher corporate taxes, and less impact on consumer spending than further personal tax increases.
SMEs will need to ensure their systems are ready to cater for the new VAT rate, but this should not be too much of a challenge for those with automated accounting systems. By international standards, VAT in South Africa is still relatively low — we can just hope that this increase is not followed by another in the next year or two. n
Managing the VAT Transition
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 30 April, the VAT rate of 14% will apply. If you receive payment on or after 1 April but have not yet invoiced for the sale, then VAT should be charged at 15%.
Cloud-based, automated accounting solutions, like Sage One, were VAT-ready on 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.
The VAT Act states that displayed pricing and adverts must include VAT (unless the product is zero-rated). You have until 31 May to complete this work. Until then, you 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. But why delay and risk confusing your customers?
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. 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.
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.
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