IT14SD Requirements And Difficulties
12 November 2012
Posted by: Author: Graeme Saggers
IT14SD Requirements And Difficulties
The Supplementary Declaration for Companies and Close Corporations(IT14SD) was launched by the South African Revenue Service (SARS) on 24 October 2011.In a letter to tax practitioners, SARS identified the IT14SD as a means to "enhance tax compliance by companies and close corporations through the verification and reconciliation of the various declarations made to SARS”. The form initially took many practitioners by surprise as it has not been specifically referred to in any legislation. Practitioners need to take cognisance of Section 66(10) of the Income Tax Act, which states that SARS may "require any person to make further or more detailed returns respecting any matter of which a return is required”.
A year after its launch, it is clear that the form does successfully attempt to enhance tax compliance; however, the additional administrative burden it creates is causing frustration for tax practitioners and business owners and potentially exposes them to more risk due to the additional cumbersome requirements which are almost unrealistic if attempted retrospectively.
The IT14SD is designed to reconcile the following types of tax returns with the relevant line items in the IT14 income tax return submitted to SARS:
• PAYE as per the EMP201 to employment costs expense in theIT14.
• Profit/loss as disclosed in the financial statements to taxable income as calculated in the IT14.
• Total output VAT as declared in the VAT201 returns during the year to total turnover in the IT14.
• Total input VAT as declared in the VAT201 returns during the year to total cost of sales in the IT14.
In essence, it is meant to reconcile companies’ and CC’s accounting reporting to their tax reporting. An in-depth understanding of the taxpayers business and industry is needed in order to accurately reconcile these amounts and it is perceived, therefore, that in order to mitigate non-compliance risks, companies and CCs must ensure they have sufficient expertise at their disposal (whether external or internal) to perform this task.Some examples of areas of difficulty in performing the required reconciliations are:
• Total employment costs may include certain expenses that are not subject to PAYE; for example, provisions for bonuses and leave pay, staff welfare and training.These expenses would need to be accurately excluded from total employment costs for this reconciliation.
• There are often differences in timing between VAT periods and financial year end of a company. Companies will therefore need to ensure they have an accurate reconciliation between these dates.
• The IT14SD attempts to reconcile output VAT declared to the turnover as per the annual financial statements, however there are certain additional transactions which would need to be taken into account, such as bad debts recovered, disposal of fixed assets,rental income, insurance proceeds and recoveries.In certain industries such as construction, the revenue recognition principles are complex and very much different from your standard business, which would make this reconciliation much more cumbersome.
• The IT14SD attempts to reconcile input VAT declared to cost of sales which therefore has not taken into account other expenditure on which input VAT maybe claimed, such as purchases of fixed assets and marketing and administration expenses.In addition,it is unclear to what amount service organisations(who are unlikely to have a cost of sales amount)should reconcile. It is also unclear to practitioners and business organisations what benefit can possibly be derived by the SARS in the calculation of input VAT on cost of sales when no accounting system separates the input VAT on cost of sales from all input VAT claimed by companies.
The above examples serve only to scratch the surface of a variety of complexities that may be discovered when attempting these reconciliations.A small company with few sales lines, minimal different operating expenses, basic employee cost structures and no separately registered divisions or branches would likely be able to derive the required information from their financial statements or, if needed, their trial balance.
A more complex organisation with multiple sales lines including zero-rated sales, exports and imports, property investments, multiple separately registered branches and divisions and various accounting provisions is likely to have a much tougher time unless their accounting system is set up in a detailed enough manner to be able to extract the required information.
Companies should conduct a detailed review of their current chart of accounts,accounting policies and procedures and set up internal controls that would assist in the compilation of the required information. The trial balance should be presented in a way that would not only serve to produce financial statements that are compliant with the relevant accounting framework, but is also easy to use to compile tax information.This will result in a more detailed trial balance and more onerous bookkeeping requirements,but the proactive approach will assist in preventing reconciliation difficulties.
It is recommended that companies employ the service of an appropriately qualified accountant in order to assist with this structure and bookkeeping staff should be suitably trained on the different tax effects of certain transactions. Whether companies opt to mitigate this additional risk externally(e.g. contracting a tax consultant or accountant) or internally (e.g. employing a tax accountant, training of current staff), it is likely to give rise to additional actual costs or opportunity costs of the additional time spent on administration.Investing in the most efficient structures up front could save a lot of time and stress down the line.
It is expected that SARS will implement certain revisions to the current form,which will hopefully allow for more clarity and details with regard to reconciling items, certain fields to be pre-populated and further guidance on the requirements of the form. The IT14SD is just another tool SARS uses to ensure that taxpayers are become more tax compliant and, in effect, is transferring much of the back office administration from SARS to the taxpayer.The Taxation Administration Act became effective from 1 October 2012 and lays out requirements which will enable practitioners to comply across the different tax acts and also identifies the consequences of non-compliance which makes provision for criminal offences for, among other offences, wilfully or negligently failing to submit a return.Companies and tax practitioners should proactively ensure that their accounting systems and internal controls are designed in a way to ensure they are able to complete an IT14SD within the required 21 days as failure to do so may result in SARS issuing a revised assessment potentially disallowing all expenditure and the company therefore being taxed on their turnover.
The process to rectify the assessment then requires going through the formal objection process which may cause further consequences such as interest being charged and delays in issuing tax clearance certificates.It is recommended,in these situations, that companies follow the pay-now-argue-later principle by settling the revised assessed taxes due before submitting the objection.This is likely to put extreme strains on most companies’ cash flows that further justifies the view that it is in companies’ best interests to avoid the potential pitfalls of the IT14SD through putting the relevant structures in place.
Source: By Graeme Saggers (TaxTalk)