Dec 22, 2021
Taxes “are the dues that we pay for the privileges of membership in an organised society”.
As the quote from US president Franklin D Roosevelt in 1936 suggests, governments across the world need to collect tax revenue to be able to provide public goods and services to their citizens. There are a number of forms of taxes. The most common taxes are personal income tax, corporate income tax, and value-added tax (VAT).
South Africa’s current VAT system is based on New Zealand’s VAT system. It was and introduced in South Africa in 1991 at a rate of 10%, replacing the general sales tax system which was levied at 12%.
Since VAT is more broad-based than the general sales tax, the effect on tax revenue collected was deemed to be neutral in terms of tax revenue collection.
The South African VAT system is found to be mildly regressive, where a larger percentage of income is taken from the poor in comparison to the rich. But it is a good source of government revenue in comparison with other tax types, as individuals in the informal sector also contribute to the revenue stream.
Overall, the South African tax system is viewed as being progressive in nature, as the rich pay tax at a higher rate than the poor . Which is why VAT shouldn’t be considered in isolation.
In an attempt to increase tax revenue collection, the VAT rate in South Africa was increased from 14% to 15% on 1 April 2018 after it had remained unchanged for 15 years (since 1993).
The increase in the VAT rate resulted in an increase in VAT payments of 4.2% in 2018/19 and 5.8% in 2019/2020.
All entities that make sales in South Africa in excess of R1 million in a 12-month period need to register as a VAT vendor. These vendors need to levy output tax on all sales made and are seen as agents of the revenue authority.
The entities can also claim input tax on all purchases made on which VAT was levied, if it is used for business purposes. The net amount remaining after subtracting the input tax from the output tax must be paid to the South African Revenue Service.
Increasing the tax rate is a seemingly easy way to raise tax revenue. However, there are dangers. We explored one of these in our research – the effect of changes in the VAT rate on tax compliance behaviour by small businesses in South Africa.
Why small businesses?
The South African Revenue Service has indicated that small businesses are a high-risk sector as tax registration is particularly low in this sector. They have also indicated that an increased audit focus will be placed on small, medium and micro enterprises.
Our field experiment involved an online questionnaire that was completed by participants in managerial positions of small businesses. The participants were assigned to one of four possible treatment groups: where the participants experience either an increase or decrease of 1 percentage point in the VAT rate, or where the participants experience either an increase or decrease of 5 percentage points in the VAT rate.
Our aim was to determine whether an increase in the VAT rate might lead to larger tax evasion. The research also considered whether tax compliance behaviour would increase with a decrease in the VAT rate, since the benefit of evading taxes might seem less appealing. Some countries, such as Kenya, Greece, Belgium, Germany, Austria, Czech Republic, Bulgaria, Cyprus, Portugal and Moldova reduced their VAT rates in the wake of COVID-19 to provide some relief.
The issues are important because businesses might opt for non-compliance if the rate is raised. This defeats the objective of tax increases as less revenue is collected.
We found that tax compliance levels among small business did indeed drop when the VAT rate was increased, especially if the increase was a 5 percentage point increase.
Compliance
Tax compliance is the term used to describe whether taxpayers meet their legal tax obligations. This includes registering as and when required, submitting all relevant tax returns on time, reflecting the right amount of tax liability and paying that liability on time.
Better tax compliance obviously leads to higher tax revenue being collected for a government.
The study found that small business entities are inclined to reduce the VAT liability when there is an increase in the VAT rate. This may possibly be because the entity perceives it to be financially more beneficial to evade taxes when there is an increase in the VAT rate, even if considering the penalties charged if caught cheating (expected utility theory). They do so by overstating purchases rather than under-declaring sales. This leads to an increase in non-compliance and a decrease in tax revenue collection.
The greater the magnitude of the VAT rate increase, the greater the level of non-compliance.
No significant relationships were identified between a decrease in the VAT rate and tax compliance.
Insights
The results could be valuable to policymakers in countries considering a change in the VAT rate to increase tax revenue.
Our research suggests that a small increase (one percentage point) in the VAT rate could limit the extent of non-compliance compared to a large increase (five percentage points).
A graduated and carefully calibrated approach, where rate increases are in prospect may, therefore, be preferable to large scale, once-off increases.
This article is published with thanks to The Conversation and the original article can be viewed here.
Dec 7, 2021
Many small business owners have their hands full with tax-related paperwork. If you’re one of them, the admin probably ranks low on the list of your favourite things to do, says Yolandi Esterhuizen, registered tax practitioner and director at Sage Africa & Middle East. However, filing accurate tax returns and meeting SARS deadlines is one of the most important responsibilities you face.
The interest and penalties payable on late or inaccurate VAT, PAYE or company income tax returns can be harsh. That means it is in every small business’s interests to prepare the relevant submissions on time and to ensure they are accurate.
Here are three ways to get it right:
Consult the professionals
Unless you’re an accountant, it’s wise to seek help from a professional to understand your tax obligations. You, or your accountant, will use the annual ITR14 declaration on the SARS eFiling system to set out your income and expenses. Your declared profit or loss for the year will determine how much tax you will need to pay, or if you will get a refund from SARS.
Some limited liability companies are required to be audited.
If you run a sole proprietor or partnership business, it will not be registered with the CIPC. You will submit a form called the ITR12 each year, and provisional tax submissions twice per year. You can do this yourself without needing to appoint an accountant.
However, a registered tax practitioner can help ensure you comply with SARS regulations and offer advice about how to reduce your tax bill by making full use of the tax deductions to which you’re entitled.
Look for a firm or professional registered with a professional body such as the South African Institute of Professional Accountants (SAIPA) or the South African Institute of Tax Practitioners (SAIT). Your tax practitioner should also be registered with SARS. Look for someone with good references who has an established base of small business customers.
Automate processes and keep electronic records
Many small business owners still use Excel spreadsheets and a shoebox full of bank statements, bills and receipts to track their assets, liabilities, inventory, expenses and payments. This approach is time-consuming and prone to error, and it also means you may end up paying an accountant more to capture and reconcile your transactions in a proper accounting system.
You can save time and frustration for yourself and your accountant by capturing every transaction in an electronic accounting system as it takes place.
A good accounting system will make it easy for you to send invoices, track outstanding payments, and monitor expenses, and today’s cloud-based solutions are easy to use and priced on an affordable subscription. An accounting and payroll solution developed for the local market will automate your payroll tax (EMP501 and EMP201) and VAT201 returns for easy submission.
Know the deadlines
You need to meet some important deadlines each financial and tax year.
Registered companies
- You must file a compulsory provisional tax return six months from the start of the financial year and another at the end of the financial year.
- You may make a voluntary submission and top-up payment six months after year-end.
- You must file your annual return within one year of the end of your financial year.
Provisional taxpayers (e.g. sole proprietors)
- You must file one provisional return and make one tax payment by end-August.
- A second provisional payment is due by the end of February (end of tax season).
- You may make an optional third payment within six months of the year of assessment if the amount paid in previous payments was insufficient.
- Tax filing season for provisional taxpayers usually begins in early June with a deadline of 31 January.
PAYE
- Submit the monthly EMP201 by the seventh of the following month or the Friday before if the seventh falls on a weekend or public holiday.
- File the interim EMP501 reconciliations (1 March to 31 August) between 1 September and 31 October.
- File the annual EMP501 reconciliations (1 March to 28/29 February) between 1 April and 31 May.
VAT
- Manual submissions of the VAT201 payment must be complete by the 25th of the month (or the Friday if the 25th falls on a weekend or public holiday).
- Electronic submissions and payment (via either SARS eFiling or Electronic Funds Transfers) of the VAT201 must be done by the last business day of the month.
This article was originally published in Business Tech and can be read here.
Dec 7, 2021
“I’m just running a small company with a few people, I don’t need an accountant!” How many times have you said that to yourself? How about the other common mantra, “We’re just a small company, we can’t afford fancy accountants!” Have you said this one? Small business owners often assume that accounting services are out of their reach. What they don’t realise is that there are accountants that specialise in small business, and to not engage with good accounting services is actually to put one’s business at risk.
Here are the best reasons to get an accountant for your small business as soon as you can:
Accountants Keep You On the Right Side of Government Policy
Whatever the government says about supporting small business, its policies and bureaucracy are generally a net burden for them. Compliance costs money, and that’s why small businesses struggle in environments characterised by heavy regulation. An accountant can be your first line of defence against such burdens, ensuring that you are at least by the letter of the law doing everything legitimately, correctly and without any risk of facing any kinds of charges, fines or penalties.
There’s actually a positive side to government policy, too, especially in Australia where there are a growing number of small business tax concessions which can help small businesses along, but they are quite complex for an average person to understand. Having an accountant, therefore, will help you navigate these rules and take advantage of their offerings.
An Accountant Will Reduce Your Workload
Next, who wants to finish a hard and long day of work just to have to sit at the table or at the computer all evening going over the day’s financial records. There are certainly software solutions that are designed to make things somewhat easier for small business owners, but none of them take away from the fact that entrepreneurs need to take away time and energy that could otherwise be spent with family, or working on new and creative ideas for their business to grow and thrive.
Leave the number crunching to those who have made it their livelihood. For the vast majority of small business owners, the accounting part is a small and separate task to complete within their business, and one that is alien to them and therefore time-consuming.
Accountants Are Valuable Advisors
They may be called accountants, but their suit jackets button up tight over a number of areas of expertise, too. They can become incredibly valuable to your business as advisors and consultants, giving you insight into the implications of your current company structuring, as well as ideas for how to cut expenses and increase revenue. They also know the local laws and regulations inside and out and so can help you find ways to make the system work better for you.
An Accountant Offers Insight into Your Business Performance
As the leader of your business, you will have to keep on top of how your team members are performing individually, but an accountant can offer you some big-picture insight into how your company is performing overall. You can get these kinds of insights week to week, month to month or year to year, the accountant knows it all. Using the feedback and advice from your accountant, you can make sensible and well-informed decisions on new policies, new directions, areas to invest more capital in and areas to cut back on.
Numbers from the accountant may even indicate where foul play is happening right under your nose. If there are people in the company behaving in a morally questionable way, then the numbers often point to their department or even to the individual, and the accountant is the one that can find those discrepancies in the numbers.
This article was originally published in Business Mole
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