The following is an article by Yolandi Esterhuizen, who is responsible for the interpretation and implementation of tax and labour law requirements for Sage HR & Payroll’s products in South Africa and Africa. It is not directly aimed at plumbers, but any small business.
“Developing a product or service that people need, want, and are willing to pay for takes skill, hard work, and of course, some luck. And in your first year of business, working on what you sell can be all-consuming. But there are other areas of your business that, if left unattended, can derail your hard work – tax compliance is among the most important.
By understanding your business’s tax responsibilities and putting the right systems in place to meet those requirements, you’ll avoid costly mistakes and frustration and, most crucially, improve your chances of running a successful business.
We’ve put together a guide to help you navigate the tax during your first year in business.
To register or not?
The type of business structure you choose will impact how you pay tax. The simplest is to run your business as a sole proprietorship, which comes with the following tax-related benefits:
Less paperwork – you are not required to legally register your business because a sole proprietorship is not a legal entity, i.e., there’s no separation between the business and the owner/proprietor. However, you will still be required to register with SARS, as an individual, for the relevant taxes.
Easier tax returns – your business’s taxable income is simply included in your personal tax return, though you will be required to make provisional tax payments (more on this in the next section).
Lower effective tax rate – the profits your business makes will be taxed at your individual marginal tax rate, whereas profits in a registered company are subject to corporate income tax (CIT) of 28% (27% from next year). Below a certain revenue threshold, you’ll pay less tax as a sole proprietor.
Of course, there are some good reasons to register your company: it adds an element of credibility to your business; it allows your business to access funding and creates a separate legal entity that protects your personal assets from creditors.
If you decide to register your business, the Companies and Intellectual Property Commission (CIPC) has an easy-to-follow online registration process. Once registered, SARS will automatically generate an Income Tax number for your business that you’ll use as a reference when submitting your tax returns and payments.
Welcome to provisional tax
So that you aren’t lumped with one large tax bill every year, businesses are required to pay their annual income tax in three separate instalments, known as provisional tax, as per the below schedule:
First: six months from the start of your financial year
Second: at your financial year end
Third: six months after your financial year end
The first two payments are based on estimated taxable income because you are required to submit before the end of each period so you can’t know the exact amount. The third payment exists in case you underestimated your income and, as a result, paid too little tax.
Similarly, if you overestimated your income, the third submission may lead to a tax refund. The form that substantiates your calculations for each period – detailing your income and deductible expenditure – is called an IRP6. You will need to submit three of these forms in every tax year.
Within 12 months of your financial year end, you are also required to submit an ITR12 (if you’re running your business as a sole proprietor) or an ITR14 (if you’ve registered your business). In this form, you are required to declare your total income and deductible expenses for your financial year so that SARS can calculate whether you’ve paid the correct amount of tax, or if an additional payment or refund is due.
In calculating your taxable income for your provisional payments, you are permitted to deduct certain business-related expenses from your turnover. Here are some examples of the expenses you may be allowed to deduct from your revenue to reduce your taxable income and, by extension, the taxes you pay:
- · Day-to-day business expenses (rent, salaries, equipment, office supplies, etc.)
- · Capital expenses (business vehicles, renovations, hardware, etc.)
- · Entertainment expenses
- · Business start-up expenses
- · Education expenses
- · Losses accrued in previous periods
If you run your business from home, you’ll be able to deduct a portion of certain expenses when calculating your taxable income.
What you’re permitted to deduct is often nuanced so involving a tax practitioner to remain compliant is advisable.
What’s the deal with VAT?
You are only required to register for VAT once your business generates or is expected to generate taxable supplies in excess of R1 million over any rolling 12-month period. Once that threshold is crossed, you have 21 days to submit your VAT registration either via eFiling or by completing a VAT101 registration form and handing it in at a SARS branch. If your business has made more than R50,000 in the last 12 months but remains under the R1 million threshold, you may still register for VAT voluntarily – in some cases this makes sense.
Once you’re a registered VAT vendor, you’ll need to add 15% to invoices you send to your customers, making sure to collect (and not spend) those monies. Then, you are required to submit a VAT 201 form, accompanied by a payment to SARS for the VAT you’ve charged and collected on behalf of the government.
As a VAT vendor, you are entitled to offset the amount of VAT you owe to SARS (known as output tax) against your business-related expenses on which you were required to pay VAT (known as input tax). If the latter is in excess of the former, SARS will need to refund you the difference within 21 days of you submitting your VAT return.
The frequency of your VAT submissions and payments depends on the ‘taxable period’ your business qualifies for. As a general rule, businesses with less than R30 million in annual turnover will be required to submit every second month, while businesses with revenue above that threshold must submit monthly.
Manual VAT payments – via post and SARS branches – must be made no later than the 25th of each month, while electronic VAT payments can be made on the last day of the month.
How to handle PAYE, SDL, and UIF
You may need to hire people in your new business. As soon as you employ someone, you become responsible for certain deductions from that employee’s remuneration and/or contributions, which are subsequently paid to SARS.
- · PAYE (pay-as-you-earn): This is the personal income tax, owed to the government by the employee on their remuneration, that you as their employer must withhold and then pay over to SARS. You have 21 days from hiring your first employee to register for PAYE, unless their level of income exempts them from paying taxes.
- · UIF (Unemployment Insurance Fund): An amount equal to 2% of your employee’s remuneration must be paid to SARS on a monthly basis. 1% is deducted from the portion of your employee’s remuneration that is subject to UIF, while the other 1% is contributed by your business. You are required to register for and pay UIF if you are registered at SARS for PAYE. You can register directly at the UIF if you are not required to register for PAYE, and make direct payments to them.
- · SDL (Skills Development Levy): If your total employee remuneration is expected to exceed R500,000 over the next 12 months, your business will need to register and pay the SDL. An amount equal to 1% of your employee’s remuneration, subject to SDL, must be contributed by you as the employer. This levy is paid to SARS which is then allocated to a SETA (sector education and training authority) for learning and development initiatives within South Africa. As the employer, you can claim back some of your SDL contributions by submitting your Annual Training Report (ATR) and Workplace Skills Plan (WSP) to the SETA you are registered with before the end of April each year.
These provisions, and the payment thereof, are handled in a single form. An EMP201 must be submitted on a monthly basis, no later than the 7th day of the following month, or the Friday before that day if the 7th falls on a weekend or public holiday declaring the total amounts due for PAYE, UIF, and SDL. A payment to SARS for that amount must be made within the same timeframe.
In addition, you’ll be required to submit an EMP501 twice a year. This form essentially reconciles the EMP201’s you’ve already submitted with the payments you’ve made, and the employee tax certificates (known as IRP5’s, the document your employees need for their own tax submissions) you’ve generated. Here’s a SARS guide to accessing the new features for Monthly Employer Declaration (EMP201) on eFiling.
Registering for PAYE, SDL, and UIF can be done simultaneously on the eFiling website.
One step at a time
We know this looks daunting. But registrations are once-off events, and many of the submissions discussed above can be simplified with the right software. Take small steps. Breathe. Check things off your to-do-list. You will get there.
If you need help, speak to a registered tax practitioner and/or a payroll specialist. There are many cost-effective, time-saving solutions that will give you the comfort of tax compliance, and the energy and motivation to tackle your next business challenge.”
WRITTEN BY Eamonn Ryan