The adage that “nothing is certain but death and taxes” rings as true to the small business environment as any other. In fact, some might say there’s even a reflexive relationship between the two: failure to pay or understand your tax requirements could actually translate into your business’s untimely demise.
The tax world can be an intimidating one to take on, but it’s comforting to bear in mind that requirements for small businesses are less onerous than larger ones.
Micro businesses (natural persons or companies that have a turnover of between R150 000 and R1-million annually) qualify for a simplified tax system called turnover tax. If your business qualifies, you can simply register for turnover tax instead of having to pay current income tax (including making provisional tax payments), capital gains tax and VAT, the world of taxation synonymous with larger corporate entities.
And the government has been easing up on tax requirements for small businesses – last year, Finance Minister Pravin Gordhan announced R360-million in tax relief for small businesses by heightening the tax threshold for those that are required to comply (in other words, companies required a higher turnover to pay the same tax as it did previously).
This year’s budget speech brought further relief, meaning that comparatively less companies in South Africa are paying corporation tax than ever before.
But even if you’re currently ‘making the break’, there will hopefully come a time when your turnover exceeds that threshold, and paying corporation tax becomes a necessity for your business.
One of the keys to making your tax experience a successful one is to learn from the mistakes of others and avoid a few frequent pitfalls.
A survey of 500 accountants in the USA, conducted by Xero online, revealed the biggest “tax-related” mistakes that small business owners make, that applies just as meaningfully in South Africa:
- Finger off the pulse: The number one mistake cited by accountants was that too many business owners “don’t have ongoing insight into their finances”. Not having a continuous feel for big expenses and the ebb and flow of the monthly costs can, and often does, result in unhappy surprises during tax season.
- The ‘don’t look now’ approach to finances: The second biggest mistake, said accountants, was made by small business owners who “only talk to their accountant at tax time”. The result of this is similar to the first: finances are managed on an ad hoc basis rather than strategically, and you’re likely to make a few nasty discoveries when corporation tax season does roll around. It is almost impossible to plan for the long-term viability of your company if you’re taking this approach, so there are several reasons to avoid it, although this is often easier said than done.
- Mixing business with pleasure: About half (45%) of accountants surveyed said that putting your personal costs through the business’s books — an all-too-frequent practice in small businesses – can heighten your chance of the revenue service singling out you out for an audit on your corporation tax.
- Home is where the tax isn’t: Do you work from home? Almost 1/3 of the accountants surveyed said that the home office was the most commonly overlooked tax deduction by small business owners. Make sure your accountant is aware of the full extent of expenses associated with your home office in order to get the full benefits from it.
Almost three-quarters of accountants surveyed said that they could give more meaningful advice to small businesses that provide them with a real-time view of their finances. But if you’re already under-resourced, don’t have a financial background or are juggling several responsibilities at once, this can be an unrealistic aim.
One solution to this could be to bring on part-time financial expertise. You can find a financial manager at the right level of know-how who has an ongoing handle on your finances in order to avoid the two most frequently-made ‘tax mistakes’. However, you’re simultaneously getting around paying the top-dollar salary that usually accompanies such a person by only bringing them on for the time you really need them.
Check in with them often enough that you are constantly au fait with your company’s finances, and use them to make strategic decisions to steer the business, rather than calling them in once a year when your business’s corporation tax is due. That way those two certainties: death and taxes – will be two completely separate conversations when it comes to your company’s corporation tax.