New tax method to help small firms

- Sanchia Temkin, Professional Services Editor - Business Day

Many businesses have yet to respond to the opportunities offered by the turnover tax system.

The country’s new turnover tax system will be of benefit to many small and medium-sized enterprises .

The tax system, which was recently launched by the South African Revenue Service (SARS), is expected to reduced the time and cost of submitting tax returns.

“Strangely enough, though, for thousands of small firms the penny has yet to drop,” said Muneer Hassan, project director for tax at the South African Institute of Chartered Accountants , who highlighted the significant potential savings in administration costs at the weekend.

SARS spokesman Adrian Lackay said recently the new tax system was intended to cut red tape and reduce the administrative burden on small businesses. The new tax system was announced by Finance Minister Trevor Manuel in last year’s budget. It is incorporated into the Income Tax Act.

Hassan said micro-businesses would be taxed under a table very different to those which applied to other taxpayers and companies.

SA’s small businesses face the heaviest tax burden when it comes to the time and cost of filing tax returns, according to recent independent research carried out at the request of the SARS and the Treasury.

It costs the average small business R1478 to register, one reason why about 60% of them decide to stay informal. Tax professionals identified provisional tax as the “most burdensome” tax for small businesses, although value-added tax (VAT) was the most expensive and time consuming, the research said.

The new legislation would be available to small businesses with a turnover of up to R1m a year and replaces income tax, provisional tax, capital gains tax and VAT. The tax will be levied on turnover and not the taxable income to which we are all accustomed, Hassan said.

He said this would make life a lot easier for small businesses because the determination of taxable income could be a highly complex exercise. Further, secondary tax on companies, where dividends were less than R200000 annually, would not be applied.

Regarding capital gains tax, the turnover tax would include 50% of the amounts received from the disposal of business assets in taxable turnover. Immovable property would only be included to the extent that it was used for business purposes.

Hassan said the turnover tax was levied annually, from the beginning of March to the end of February of the following year. Payments were to be made in two six-monthly interim, or provisional, payments.

He advised that in order to opt for the turnover tax a business needed to apply before the beginning of the year of assessment and remain in the system for at least three years, unless disqualified.

This year SARS extended the registration date to April 30.

Small businesses VAT headache

- Monique Vanek - Moneyweb Tax

Sarss new registration requirements are making it incredibly onerous for small businesses to comply.

If one had to pinpoint the two big tax issues that are getting up South Africans noses it would be provisional tax (see: Provisional tax: a tax nightmare) and VAT registrations.

According to Colin Wolfsohn, a member of the Saica National Tax Committee, the South African Revenue Services (Sars) new VAT registrations are proving to be incredible onerous for small businesses, making it harder for them to comply. The registration process is causing substantial delays and increasing the cost of registering an entity for VAT significantly, adds Wolfsohn.

Sarss decision to change the VAT registration process in November 2008 followed the discovery of significant VAT fraud last year (see: Sarss employees caught out) after it simplified the registrations process in February 2008. Sars at first became incredibly draconian before backing down (see Sars backtracks on harsh VAT registration ) to the current situation, which has its own problems.

Currently:
1. Applications have to be submitted in person by a vendor, or duly authorised and registered practitioner. These practitioners have to be in possession of a valid practice number. A practitioner must submit an original letter of authority or power of attorney together with the application form, in which they are duly authorised to act on behalf of the vendor.

2. The following validation on new applications are then done by Sars:

a. Completeness of the form - incomplete forms are not processed.

b. Each application has to include proof of identity; a copy of the municipal account of the enterprise and copies of the last three months bank statements or the financial information on which the turnover is based for purpose of VAT registration.

c. Confirmation that the applicant is a valid enterprise. This entails a short interview with a Sars auditor. Sars advises practitioners to either empower themselves with all relevant information relating to the vendor upfront, or to ensure that the vendor is available telephonically to answer any questions Sars may have during the interview.

d. This could be followed up by a site visit to the vendor if required.

Sars also increased the threshold for registering for VAT to R1m of turnover from R300 000 with effect from March 1 2009.

Small businesses which operate from home have found it impossible to prove identification through municipal accounts (as these accounts will be in the name of the owner and not that of the VAT entity), reckons Wolfsohn while new businesses find it difficult to work out what their turnover will be. And yet they have no choice but to some how try and comply. Failure to do so will be regarded as “an offence in terms of section 58 of the VAT Act and as such shall be liable to conviction to a fine or to imprisonment for a period not exceeding 24 months“, says Saicas Muneer Hassan “The entity will also be liable for huge penalties and interest,&rldquo; adds Hassan.

To deal with the crisis, Wolfsohn suggests Sars allow tax practitioners to do some of the verification work and if Sars is concerned about fraud then it should do an audit.