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Just How Taxing Does The Balance Sheet Need to Be?

Friday, 16 September 2016   (0 Comments)
Posted by: Author: Marc Sevitz
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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 designed for.  

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 business first. 

Only time will tell. 

This article first appeared on the September/October 2016 edition on Tax Talk.



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