Just How Taxing Does The Balance Sheet Need to Be?
16 September 2016
Posted by: Author: Marc Sevitz
Author: Marc Sevitz (TaxTim)
Although starting a business is always a rocky road,
ignoring your business’ tax affairs during the early days has the potential to
wreck an enterprise before it has reached full speed.
Small businesses are the backbone of most modern
economies. Despite often being overshadowed by their giant counterparts - large
multinationals and listed companies - they remain a key driving force behind
job creation and skills development. But their contribution does not come
without challenges, especially when it comes to financial matters.
Typically, we see small businesses begin their journey
with one or two founders making use of their own money to fund their
endeavours. With limited resources, these business owners are forced to juggle
priorities to stay afloat and tend to operate on a week-to-week or
month-to-month basis. They spend a lot of their time "in the business” dealing
with tactical execution, as opposed to "on the business” concentrating on
laying a solid strategy for long-term success. As a result, unless an owner is
particularly astute financially, critical business aspects such as accounting
and tax are relegated to the "to-do when we have time” pile, or worse, simply
ignored. This negligence can have a damaging effect on growth opportunities
further down the line.
Let us consider the scenario where the business is not
as yet profitable, but is growing well from an operational perspective and
showing promise. At this point, the owners may decide to seek out investment or
funding from banks, venture capital organisations or family and friends. Unless
the business is "the next Facebook” or another high-tech venture, prospective
investors will want to see comprehensive financial records to substantiate
potential funding. This undoubtedly includes scrutinising the tax position of
the business to determine any outstanding or potential liabilities or whether
the structure is optimised for the business.
A lack of substantial financial data will result in
either having to walk away from a deal, or spending a significant amount of
time and money retrospectively getting financial matters in order, often at a
far higher expense than what it would have cost at the outset.
It is imperative when operating a growing business for
owners to have a firm understanding of their business’s financial situation.
While many would be able to recite the general analytics of the business in so
far as number of customers, units sold, staff members, etc. few will be able to
offer the profit, loss and cash position of the business at any given time.
The latter relies on effective accounting systems to be
in place and taxes to be administered correctly. If none of the owners are
capable of diligently managing the financial aspects of the business, it is
critical to appoint the right person to do so – and it is wise to do so from
the very beginning. This ensures that owners will have the vital financial data
on hand to make informed businesses decisions.
Taxes, in particular, are a sticking point for small
business owners. Unlike an operating or capital expense, tax payments do not
necessarily equate to a tangible benefit. Not much of a thrill factor for an
owner in the early stages of establishing a small business.
But pay they must.
In South Africa, the requirements of paying tax places
a heavy administrative burden on companies towards the end of each and every
month. An administrative burden that few small businesses can afford in terms
of time, effort and resources when they are more concerned about maximising the
bank balance for month end. Resources aside, there is also the need to have
thorough knowledge about tax namely, what your obligations are, how to fulfil
them, the different tax regimes applicable to and most importantly, how to best
structure tax for the benefit of the business.
The Income Tax Act includes
special tax regimes for different sized entities, but the differentiators are
mostly in the way transactions are taxed and not the manner in which taxes need
to be declared, submitted and paid. Examples are Turnover Tax for micro
businesses (i.e. those with less than R1million in turnover for the tax year)
and small business corporations that have their own tax rate and declaration
process. Despite the best intentions of the revenue authorities, neither of
these regimes are regularly taken advantage of by those they are specifically
PAYE (Pay-As-You-Earn) is another headache for small
business owners who have taken on a staff complement. Employees in this sector
often suffer as a result of incorrect PAYE deductions or non-deduction
resulting in them owing SARS money come filing season. Aside from the potential
penalties the business may incur, this oversight can lead to a bigger issue.
Disgruntled staff pose a big risk to small businesses who should be focussing
on keeping personnel turnover to a minimum in the early growth stages. There is
no quicker way to upset an employee by not helping them to meet their
individual tax obligations through their remuneration. Part of that process
means structuring an employee’s payment package properly, providing for the
allowances or benefits applicable to their role, and deducting the correct PAYE
so that employees are not left liable to SARS at the end of the tax year.
In addition to the above, small business owners need
to know how to comply with PAYE submissions, semi-annual reconciliations and
provisional declarations, understand and apply VAT obligations when necessary,
grasp the concepts and regulations for the various tax categories – e.g.
corporate income tax and dividends tax - and moreover, how this all impacts on
the metric they care most about: the cash flow of the business. It can be
overwhelming and it is no wonder that we see many choosing to put their head in
the sand and hoping that if they ignore it long enough it will go away.
These are all highly complex financial matters and most
certainly best left in the hands of someone with the necessary expertise to
handle them effectively for the business. And it is recommended that person is
involved right from the beginning of the journey to avoid the numerous pitfalls
for small businesses that come from not having accounting and tax affairs
properly in place from the start.
The small business environment is exciting, but at the
same time it is intricate and challenging. It is the sector essential to any
economy. Provide a framework for entrepreneurs to thrive and the economy will
flourish, strangle their potential and the economy will remain sluggish. Much
can be done to assist the proliferation and success of small businesses.
There are several potential tax changes that have long
been touted to assist small businesses in so far as easing worries about
administrative and cash constraints. The simple idea is that leaving a young
business to get on with its growth-based activities in the early days, will
lead to a successful larger business that would be able to contribute more to
taxes, employment and the overall economy in the long run.
The remaining challenge is whether those who own the
business as well as those with the power to shape the environment will put the
Only time will tell.
This article first appeared on the September/October 2016 edition on Tax Talk.