Another growing threat for taxes in South Africa: SARS

The South African Revenue Service (SARS) has flagged the country’s high youth unemployment rate as a potential future problem for the country’s taxes.

The concerns are highlighted in the revenue collector’s annual performance plan for 2021/2022, which details some of the key issues facing the group and how it plans to address them.

“South Africa is a country of young people, as recent statistics released by Stats SA indicate. The same is true for our current individual tax base,” it said.

“The high, and growing, unemployment amongst the youth is a serious threat to the tax base and the overall integrity of the tax system. It has become a serious constraint to revenue growth and will cause further strain on government to increase spending on social benefits.”

Statistic South Africa’s latest unemployment numbers for the fourth quarter of 2020, showed that South Africa’s unemployment rate hit its highest point in 12 years at 32.5%.

In the fourth quarter of 2020, the official unemployment rate for young people (aged 15–24 years) was 63.2%, a 1.9% increase from 61.3% in the third quarter of 2020, AfricaCheck reported.

Youth continue to be hit 

Data published by the National Income Dynamics Coronavirus Rapid Mobile Survey (NIDS-CRAM) on Wednesday (12 May), shows that the country’s move to introduce harsher lockdown restrictions at the start of 2021 also impacted churn in the job market.

The NIDS-CRAM is a study conducted by a national consortium of 30 social science researchers from local universities, as well as groups like the Human Sciences Research Council and the Department of Education.

Between October 2020 and January 2021 there was still significant churning in the labour market with about one-fifth of those employed in October not employed in January, and about a fifth of those not employed in October finding work in January.

Rates of job finding among the non-employed were similar across age groups, while job loss was strongly and negatively correlated with age.

Comparing outcomes for youth (18-24), prime-age adults (25-40) and middle-aged adults (41-55) it is clear that the youth were most affected by job losses.

Job loss for the youth was more than double (-31%) job losses for middle-aged adults (-13%) and also much higher than for prime-age adults (-19%).




Reinvigorate Your Career by Taking the Right Kind of Risk

Stephen Curry has built his NBA career on taking shots that others don’t: three-pointers from a crazy distance. Traditionally, defenders didn’t worry much about contesting these long-distance shots; there’s such a low likelihood they’ll actually make it into the basket. But the Golden State Warriors star practiced and practiced until they weren’t unlikely for him.

Curry’s game is an example of taking on competitive risk. Rather than going head-to-head with other players in the crowded area right under the basket, hoping to make a shot in the midst of heated competition, he set up shop where others were not: 30 feet from the basket. He perfected a distinctive strength of making a high percentage of long-distance shots.

Jon Buchan, the director of London-based Charm Offensive, a creator of innovative cold emailing campaigns, applies Curry’s disruptive basketball strategy to business: “Find a gap,” Buchan writes. “A chink in the armor. What is nobody else doing? Why is nobody else doing it? Would it be beneficial to get good at it? If so, try it.”

Embracing market risk in our careers is a high-percentage move. Figuring out what no one else is doing, and then doing it well, offers the greatest possibility of success, rapid acceleration, and hyper-growth. We are increasingly aware of the importance of assuming market risk when it comes to starting or growing a business, but assuming market risk is also a critical accelerant of the personal disruption that fuels individual career growth. My mantra is that businesses don’t disrupt, people do. Businesses can’t disrupt unless people do. However, many people don’t know what assuming market risk looks like when applied to their career.

Try one of these disruptive ideas to accelerate your career trajectory:

Create a position for yourself using your distinctive strengths as the template. Sarah Feingold was a corporate attorney who enjoyed expressing her artistic talents by making and selling jewelry on Etsy as a side gig. She loved the company and the concept of Etsy, and when she discovered it was launching some new policies, she wrote to the customer service team and offered her insights as an attorney. They brushed her off, so she contacted the founder of Etsy directly and spoke with him. After hanging up, she started thinking, “I can add value to this company, and they clearly need the value that I could add.” So she booked a flight to New York City, called the founder back, and said, “Hey, I’m coming down for an interview. You need in-house counsel, and you need it to be me.” Because of her willingness to embrace market risk and take on a role that didn’t yet exist, Feingold spent almost a decade as general counsel at Etsy, at the intersection of her passions — creativity and the law — in a job she handcrafted for herself.

Innovate a product or service from within your position. In 1979 interest rates skyrocketed, rising to over 20%, causing real pain in the banking industry. Craig Hatkoff, now a successful investor, philanthropist, and cofounder of the Tribeca Film Festival, was then fresh out of business school, working for Chemical Bank, and about to lose his job. He had a brief window of reprieve, and during this time of deep uncertainty, Hatkoff hit on the idea of the bank guaranteeing loans but securing actual funding for those loans from other parties, to alleviate the pain point created by the bank’s high interest obligations. Hatkoff’s idea, now known as letters of credit in lieu of funding, became a crucial financial instrument for Chemical Bank and the industry as a whole — and rescued his job. Not all innovations are so widely impactful, but every firm has pain points begging for someone who will embrace market risk to find a cure.

Look for opportunities outside your domain.We are increasingly not defined by the discipline on our diploma. The majority of the positions considered most in-demand today didn’t even exist when I finished college, and this evolution of the job market is only accelerating. You have a range of skills, not just one, and it’s likely that you are qualified to contribute in many ways. If you’re a manager, consider unconventional hiring as a deliberate tactic to shake up your business. Lisa Aumiller is a veterinarian who took a market risk and started a mobile veterinary service, which after a few years now tops $5 million in annual revenue and employs over 60 people. But it’s who Aumiller hires that is most disruptive: She consistently looks outside her domain, hiring employees from fashion, chemical manufacturing, franchising, and other disciplines. She likes people who can think outside the box of veterinary medicine and offer fresh perspectives from expertise acquired in other fields. And she likes to hire people who’ve been fired — for the right reasons — because she feels her business needs employees who are willing to challenge the status quo. Willing, in fact, to challenge her.

When people innovate in their career paths, disruptive energy is generated within teams, firms, and industries. Conversely, without making market risk–embracing moves like these, careers can stagnate — and businesses along with them.

Ask yourself: Do I see an unoccupied niche to fill or an unmet need that could be addressed by a change in my situation? It might be a change within your present firm — every business has unoccupied niches and needs that aren’t being met, large and small. Or you may want to move to a different firm, or even a different domain. Maybe the role you want exists and maybe it doesn’t, as it awaits someone to champion an idea and sell it.

Disruptors don’t just look for unmet needs; they look for unmet needs that mesh with what they do well — a position of personal strength. What is it that you do well that others in your sphere do not, and where can you put that superpower into play? That is your market risk opportunity. Don’t be afraid to take the long shot.



Tax-deductible expenses for small businesses

Cash flow is the lifeblood of any new or small business.

The need to reinvest, so that your business may become sustainable, is at constant odds with the need to cover your business expenses.

However, many entrepreneurs aren’t sure which expenses can be used to reduce their taxable income, which in turn would improve their cash flow and give their businesses a better chance of success.

To help you achieve this outcome, we’ll highlight the common business expenses that may be tax-deductible, a few that need special treatment, and the record-keeping needed to ratify your deductions.

A list of deductible business expenses

Incurring a qualifying business expense and neglecting to use it to reduce the tax you pay is money down the drain. SARS provides the following definition when establishing whether a business expense is tax-deductible. There is one rule, though: it must be an expense incurred in the production of your business income, but not of a capital nature.

Below is a non-exhaustive list of the expenses you may be able to deduct from your taxable income:

+Only wear and tear on the qualifying assets may be allowed as a deduction as set out in SARS Interpretation note 47.

*Incurred before your business began trading, to the extent that said expense would have been allowed as a deduction under S11.

^The onus is on the taxpayer to prove that expenses were incurred in pursuit of business.

You are also permitted to offset any previous operating losses incurred by your business against your taxable income in the current year, provided an active trade or business of a similar nature is carried on without interruption.

Given the varied nature of commerce, some of these expenses will be necessary in the operation of your business, and others won’t. The best approach would be to think of every expense as an opportunity to reduce your taxable income, and then to either verify the deductibility yourself or run it past a certified tax practitioner.

Most often you can deduct the full, qualifying expense in the year it is incurred. But there are cases where the deductible amount doesn’t come so easy.

Nuanced tax-deductible expenses

Let’s assume you have decided to start a physiotherapy practice, which you will run from your home.

Wear and Tear (Depreciation): To get your business ready for operation, you’ll need to buy equipment like treatment beds, ultrasound machines, and a computer. Asset costs not exceeding R7,000 can be deducted in full, but any asset that costs more than R7,000 is considered a ‘capital’ expense and must be written off over time. The value the asset loses each year through wear-and-tear is tax-deductible. SARS has compiled a comprehensive document (interpretation note) detailing which assets qualify and how to calculate the annual wear and tear figure thereon.

Home office expenses: Because you’re running your physiotherapy practice from home, there’ll likely be household expenses that, in essence, contribute to the operation of your business. Water and electricity, building insurance, and Wi-Fi costs are but a few examples. As a result, you are permitted to deduct the portion of these expenses that are applicable to running your business. A general rule of thumb is to work out the size of your office space as a percentage of the total square meterage of your house and then multiply any qualifying costs by that percentage to get to your tax-deductible amount.

Licenses: You are required to have a license to run a physiotherapy practice. If the license is valid for only one year, then the full amount will be deductible in the year it was incurred. But if the license is valid for a multiyear period, the annual deduction may not exceed the total cost of the license divided by the number of years for which the license will remain in effect.

It’s all about record keeping

An in-depth understanding of which expenses can be deducted from your taxable income is a great starting point – but it won’t mean anything unless that knowledge is matched by a precise record-keeping regime. Here are some examples of the records you must keep:

  • Copies of both the invoice and receipt (as proof that you made the payment) for any qualifying expense that you want to deduct from your taxable income.
  • A schedule of your entertainment expenses which includes the date, who you entertained, the purposes of that entertainment (prospecting, new project, etc.), the venue, and the cost – this will make it easier to prove to SARS that the expenses were genuinely business-related.
  • Depreciation schedule showing how you calculated the annual amounts deducted from your taxable income. Make sure you have the proof of purchase (invoice) of the asset in question.
  • Any expenses you claim that have to do with travel (fuel, toll fees) or vehicles (repairs, insurance) must be backed by a logbook that details your odometer reading at the start and end of the financial year, the business mileage you accumulated during the year, and the details around each trip taken (date, reason for travel, distance covered). This will allow you to calculate the portion of deductible travel/vehicle expenses applicable to your business activity.

There are a few ways you can make the process of record-keeping easier. First, open a business bank account from which to pay all business-related expenses. That way you’ll more easily be able to track your expenditure. It’s also a good idea to open a savings account linked to that business account where you can ringfence the income tax you owe to SARS.

Second, create a filing system for your receipts that separates your expenditure into buckets (entertainment, office supplies, marketing, etc.). This will improve consistency in terms of how you treat each type of expense and make it easier to locate supporting documentation should the need arise.

Lastly, use accounting software to automate the management of your income and expenses, and gain the additional benefit of the insights that can be pulled once that data is digitised.



Small Business Data Protection: low hanging fruit

The 12-month grace period for South African businesses to comply with the Protection of Personal Information Act (POPIA) ends on 30 June 2021.

Whether your business is listed as a corporate or sole proprietor, the legislation is binding, with non-compliance penalties of up to R10 million or 10 years in jail. That’s motivation enough to get your personal information records in order.

As a small business, a personal data breach, the primary blunder that POPIA seeks to mitigate against, can negatively impact your brand, resulting in a loss of trust and sales. Protecting the personal data that you process is no longer an option – it’s business-critical.

The good news is that there are a few steps you can take as a small business owner that’ll move you closer to POPIA compliance and significantly reduce the chances that you suffer a personal data breach.

In understanding what follows, keep in mind that ‘personal data’ relates to the processing (generally collection, sharing, or storage) of information for both natural and juristic persons. In other words, you need to protect the data of your employees and customers, as well as your suppliers and business partners.

Collect quality data

POPIA has eight conditions that need to be met when processing personal data. There’s a fair amount of legalese and overlap in these conditions, but the consistent message is to be purposeful about how you process personal data and transparent about your motives for doing so.

Accuracy in data collection and processing is paramount because, under POPIA, the person whose information you hold has the right to request their ‘file’ at any time. If their record is inaccurate, outdated, or incomplete, it could invite investigation into your POPIA compliance, which could impact your reputation.

For the sake of compliance and perception, then, a simple but systematic records management plan should be put in place, detailing how you’ll go about collecting information, how it’ll be processed, which details are required (age, gender, race, address, etc.), how long records will be kept, how you’ll dispose of redundant data, and who will champion the implementation of the plan (POPIA requires you to appoint an information officer). There are also numerous record management software solutions that you could consider.

Why would you make the effort to capture and process personal data in the first place?

One of the main attractions is being able to communicate with your target market effectively to drive sales; email marketing remains one of the most powerful tools for small business growth. In order to contact customers through such channels, you’ll need to have a record of where their personal data was collected from (website, competition, or tradeshow) to show that the target gave you permission to contact them. Without that paper trail, you’ll be non-compliant and vulnerable to penalties.

Sidebar: As a result of POPIA, we should all be receiving fewer cold calls once the grace period comes to an end. Thank goodness for that.

Store in the cloud

The safety of the personal data you process is largely dependent on where it’s stored.

Using a decentralised system – where data is spread out over numerous hard drives, or in physical draws and folders – is inefficient and dangerous because it makes it easier for you to lose that information, and easier for others to access it.

Choosing instead to store all personal data you collect and process in the cloud comes with the following advantages:

  • Cloud service providers are increasingly using AI to conduct ongoing security analysis
  • Built-in firewalls improve network security
  • Data is backed up at multiple locations in case of disaster
  • Access to data in the cloud can be restricted to only the employees who need it

Because you’ll now be required to divulge personal information upon request from the subject, having all their data in one place, organised in an orderly fashion, will also reduce the amount of time you spend dealing with such requests.

Let the upgrade run

You may think that small businesses like yours won’t attract the attention of hackers. You’d be wrong. They know that bigger businesses have the resources to protect their data; small businesses are an easier target because data security and protection often play second fiddle to the more pressing issues small business owners must conquer on a daily basis.

The nefarious ingenuity of those trying to commandeer your personal information means that your software providers constantly refresh their embedded security measures to keep your data safe. But if you don’t run your software updates when they’re released, your systems become temporarily vulnerable to attack.

Keep in mind that the cybersecurity resilience of your business is only as strong as the weakest link; if a hacker gains access through a poorly protected device, they can move through your network quickly. That means you need to have up-to-date software across all the devices used to keep your business running, including laptops, mobiles and tablets.

Educate your employees

Human error is one of the biggest risks when it comes to protecting your business against a personal data breach. In the course of business, employees will have access to all kinds of sensitive information that, with or without them being complicit, could end up in the wrong hands.

It follows that your employees must be made aware of their obligations under POPIA, and what threats they are likely to face from the hacking underworld. This can be done via e-learning courses that are affordable and time conscious. But if you simply make data protection an item on your weekly or monthly agenda, so that it remains front-of-mind, your employees will be better able to spot the majority of circulating scams.

Making your business POPIA-compliant will take some work. But with a little perseverance in inputting the above measures into place, data protection will become second nature within your organisation.

Legal disclaimer

  • The information contained on this website is for general guidance purposes only. It should not be taken for, nor is it intended as, legal advice.
  • We would like to stress that there is no substitute for customers making their own detailed investigations or seeking their own professional advice if they are unsure about the implications of the POPIA on their businesses.
  • We would like to stress that there is no substitute for customers conducting their own detailed investigations or seeking their own professional advice if they are unsure of the implications of POPIA on their businesses.
  • We will not accept any liability for errors or omissions and will not be liable for any damage (including, without limitation, damage for loss of business or loss of profits) arising in contract, tort or otherwise, from the use of or reliance on this information or from any action or decisions taken as a result of using this information.



Tax Transparency and SDG16

How can you claim to uphold the law if you are not transparent about your tax compliance status?

Is tax always a dry and technical subject removed from basic corporate values and sustainable operations?

It certainly is not, argue both Damian Judge CA(SA), the CFO of Trellidor South Africa, and Canadian CA Carla Perry, who is the Senior Manager, Tax Reporting and Strategy at PwC. They point out that although it requires a methodical approach, tax is not something that only applies occasionally. It directly affects the status of individuals and companies as law-abiding members of society. ‘In essence, how can you claim to uphold the law if you are not transparent about your tax compliance status?’ asks Judge.

Tax compliance is of particular interest in meeting the United Nations Sustainable Development Goal 16 (SDG 16), which refers to upholding the rule of law. No business operating with an eye on sustainability can ignore this. ‘Simply put, paying your fair share of taxes in the country your business operates sustainably is vital,’ argues Judge. ‘We all have a role to play in creating an environment of transparency and accountability and a simple example is looking at your tax and how you report about compliance to the SDGs to your stakeholders.’

He refers also to the work done by PwC in promoting tax transparency. Carla Perry focuses on assisting clients to transform and optimise their tax function and says: ‘The tax transparency landscape is constantly evolving, and tax is becoming a key sustainability issue. The release of the new Global Reporting Initiative (GRI) 207 sustainability standard on tax at the end of 2019 (effective 1 January 2021), as well as the increased interest from environmental, social, and governance (ESG) investors in the tax affairs of businesses, supports the increased importance of tax in relation to sustainability and transparency. The implications for tax and transparency are wide-ranging, and the levels of scrutiny will only intensify as a consequence of COVID-19.’

PwC recently released its findings of a review of voluntary tax reporting for the 2019 financial year of the top 100 companies by market capitalisation listed on the JSE as at 31 December 2019.1 The performance of each company was assessed against the PwC-developed tax transparency framework. The review summarises the trends in the tax transparency landscape and provides examples of how companies use voluntary tax disclosure to demonstrate their corporate citizenship as responsible taxpayers.

Not in isolation

Perry says there is a range of approaches to disclosure. ‘It is important to consider the purpose of a transparency initiative and the value that it will bring to your organisation.’ Many companies are considering their disclosures and asking ‘which tax transparency principles should I follow?’ However, she believes companies should rather be asking ‘who is reading my disclosures, what do they want to know, and what do I want to tell them?’.

Tax numbers and disclosures required by the International Financial Reporting Standards (IFRS) and other reporting standards only provide part of the tax transparency picture, because ‘it represents easily understandable information on the broader economic contribution that a taxpayer makes by paying taxes in the environment in which it operates and puts this information in the correct context. However, without further detail about a company’s tax affairs, there is a risk that information may be interpreted incorrectly. We know that multinationals and large corporates are under constant scrutiny to be responsible and operate with purpose.’

Perry adds: ‘For some companies it may no longer be sufficient to just be correct and compliant. Instead, they could choose to become proactive and demonstrate their compliant behaviour convincingly. For some this would add credibility to their reputation, and for others it may enhance their relationships with external stakeholders.’ Communicating an organisation’s position on tax and its contribution to the society in which it operates builds long-term trust with stakeholders such as employees, suppliers, investors, NGOs, revenue authorities, the general public and others. ‘Voluntary tax transparency is also a way of demonstrating that a company actually does business in a sustainable and responsible way.’ She adds that an organisation’s approach to tax disclosure should not be seen in isolation, but depends on overall business strategy, broader stakeholder reporting and sustainability reporting commitment.

As the sustainability debate continues, it also allows compliant taxpayers to stand out among their peers. Perry notes that the content of what is being disclosed in terms of tax transparency will differ among organisations according to their needs. ‘It is crucial to find the right focus and balance and companies need to realise that voluntary tax transparency must be supported by robust data and evidence.’ This also relates to transforming the tax function to be ready for the future, including the incorporation of technology and visualisation to enable quick, comprehensive and user-friendly disclosure.

Which guidelines to follow?

Judge agrees that it makes sense to supply detailed information to ‘give life to the numbers’. However, he notes that, according to the PwC report, the provision of information is not consistent, and each organisation discloses in its own way. This leads to asking whether multiple frameworks or guidelines have a major impact on how to adopt a reporting mindset.

Perry says yes, a multitude of local and international frameworks and guidelines exist to help stakeholders understand a company’s tax affairs. ‘In South Africa we have King IV; globally there are many initiatives and standards, among others GRI 207, the UN United Nations-supported Principles for Responsible Investment and SDGs, the B Team Responsible Tax Principles, the OECD guidelines and the World Economic Forum’s stakeholder metrics towards the SDG goals.’ Each has different needs in mind. In principle, however, Perry does not think that the numerous guidelines hinder the adoption of tax transparency and disclosure, as they make organisations consider their tax disclosure in terms of ‘for whom and what purpose they are reporting’ instead of simply using it as a template or tick-the-box exercise to meet certain requirements.

Nevertheless, the number of guidelines available ‘can make the task of tax transparency very daunting for organisations’. She believes that a good starting point would be the newly developed GRI 207 Tax 2019 guidelines, the first global standard for comprehensive tax disclosures. It includes country-by-country reporting and is intended ‘to help an organisation understand and communicate its management approach regarding three key areas: approach to tax, tax governance control and risk management and stakeholder engagement’.

Judge adds that the GRI has ample documentation and a guide mapping out what business actions could be relevant to an SDG, with tax coming through strongly.

The PwC report and SDGs

Judge then notes that the PwC report makes limited references to links between disclosures and SDGs. Perry responds that although not exhaustive, the 2018 report released early in 2020 included some examples of quality voluntary tax transparency. One of the sub-criteria of the assessment is whether there is mention of paying taxes in the developing world and the commitment to the UN SDGs. For instance, SDG 17 ‘relates to strengthening the means of implementation and revitalising the global partnership for sustainable development. We would look for evidence acknowledging that tax is vital to funding the services and infrastructure critical to society,’ she says.

‘A company’s tax payments are a way of compensating society for the institutions and services to which it has access. The SDGs are a call for action and tax plays an important role in achieving the goals and providing the funds to achieve them. However, we often see that, in its integrated or sustainability report, a company would discuss its contribution to SDGs in great detail, but not specifically link tax to any of the SDGs. This comes back to an awareness of the role of tax, which includes all taxes and levies paid by the company and collected on behalf of government. These could be integrated into the organisation’s tax strategy, but also through picking out the specific SDGs that the company has selected and then addressing it there.’

Perry says the recently released PwC report for the 2019 tax year already contains some changes.

‘It shows how companies are telling their own tax stories in a more mindful, outcomes-based manner. There has been an effort to demonstrate value-creation in a sustainable manner … We’ve noted that there has been a significant increase in the number of companies that mention paying taxes in the developing world along with their commitment to the SDGs. Unfortunately, there are still very few companies mentioning the importance of tax transparency and stakeholder interest in tax and fewer organisations actually provided a description of the assurance process for disclosure relating to tax and payments to government in this year’s report compared to what we saw in previous years. So, I think there is a definite need for improvement.’

She adds: ‘We are interested in seeing how companies start integrating their voluntary tax disclosures with other company-related disclosures.’ With the topic gaining international interest, and as companies set and evaluate their ESGs, the PwC report will be looking for more indications that companies are recognising the links between those goals and SDGs. She believes the best way to improve this linkage is through education.

‘We all have an opportunity to do better, and a reset of people, planet, prosperity and purpose is needed to allow for a just and sustainable future for all.’

‘You are bringing something good!’

Judge says there is much ‘low-hanging fruit to be picked’ and enthusiasm among people of all walks of life to reach the SDGs by 2030. ‘It is all going to come down to reporting,’ he says, ‘and much can be done in a simple way. Start small and work from there.’ He tells how, at Trellidor, he got people from different departments together to form a sustainability working group. ‘It is amazing how people from different walks of life, ages, and races – accountants as well as non-accountants – are generally on the same page and want to do better.’

He remarks on the energy and buzz in the team and Perry agrees it is exciting to see how engaged people at their clients are. ‘You are bringing something good. I’m not coming and telling you to file your taxes, or to report on this or that, or that you have to do something gigantic. It’s actually about things that have an impact and make a difference. You would not think that a tax adviser or the CFO of a company would have this kind of impact, but in these conversations, you can really start making some headway.’ Most of these SDGs and initiatives are appropriate and even ‘common sense’ but just need to be thought about correctly and delivered appropriately, she adds.

The links between the SDGs and reporting

Damian Judge also stresses the awareness of the links between the SDGs and reporting. He summarises some tax transparency and compliance ties to SDG target 16.3 (‘Promote the rule of law at the national and international levels and ensure equal access to justice for all’):

  • Business action relevant to the rule of law falls into two categories: ‘respect’ and ‘support’.
  • Respect the rule of law through human rights and universal principles by not engaging in corruption and not fuelling conflict, while modelling responsible conduct in the business’ corporate values, policies and processes throughout its value chain. Also do no harm and implement robust management procedures.
  • Support the rule of law by taking action beyond responsibility. This implies a positive contribution towards strengthening legal frameworks and promoting more accountable institutions. Businesses should provide support to governments, judiciary and enforcement agencies through public policy, advocacy and institutional capacity-building. They should furthermore support efforts towards justice for all by developing innovative products and services that help users readily to understand their rights and where to obtain additional guidance and, if necessary, representation through pro bono legal services.
  • Businesses should raise awareness about the relevant laws, codes and regulations among their employees. They should report incidences and consider the impact of such incidences on stakeholders and shareholders. They should also facilitate access to legal services for employees.
  • Businesses should establish strategies that incorporate business compliance, legitimacy and licence to operate. This implies reviewing codes of conduct and standards of behaviour, implementing internal and external mechanisms to report unlawful behaviour with appropriate escalation methods, and disclosing information on sanctions for non-compliance with laws and regulations relating to human rights. They should report information regarding breaches of customer privacy and losses of customer data. It also implies legal actions for anti-competitive behaviour, anti-trust and monopoly practices, and incidents of non-compliance with regulations and voluntary codes about product and service information (such as labelling and marketing communication, including advertising, promotion and sponsorships).


VAT Toolkit for Small Businesses

Understanding the nuances of Value Added Tax (VAT) can mean the difference between a business that thrives and one that struggles to survive.

In this article, we unpack the fundamentals of VAT, how it might apply to your small business, and when to register for VAT. We also cover important VAT do’s and don’ts to help you avoid potential pitfalls.

What is VAT?

VAT was introduced in South Africa in September 1991, replacing a pre-existing regime known as the General Sales Tax (GST). VAT is an indirect tax based on consumption in the economy. This means it is levied on goods and services, not on your personal income or corporate profits. VAT is currently levied at the standard rate of 15% on most supplies and importations, but there is a limited range of supplies of goods or services which are either exempt or which are subject to tax at the zero rate.

Once you’re registered as a VAT vendor (we’ll deal with when to register in a moment),

vendors are charged with the responsibility of levying VAT (output tax) and paying it over to the SARS after deducting permissible VAT inputs and other deductions.

To illustrate – let’s say your small business manufactures and sells eco-friendly bicycles (see Figure 1). Here is how VAT comes into play:

  • It costs R800 (excluding VAT) to make one bicycle.
  • You’d like to make R200 profit per unit, so you sell the bicycles for R1,000 (excluding VAT) each.
  • As a VAT vendor, you must add 15% to your selling price, taking the selling price to R1,150.
  • The additional VAT amount of R150 (1000*15%) that you’ve collected from the buyer is known as output tax.

Figure 1: Example of VAT Financial Implications 

Output tax creates a VAT liability because you now owe that money to SARS.

However, as a VAT vendor, you can reduce your VAT liability by deducting input tax. This is the amount of VAT you paid on the expenses you incurred to manufacture the bicycle. In this case, your input tax would be R120 (800*15%). If you had bought the bicycles for R800 (including VAT), the denominator for your input would be different, as the VAT amount would be included in the R800 (i.e., 800*15/115).

By offsetting your output and input tax, your VAT liability is reduced to R30.

You’d then submit your VAT return to SARS, detailing both your input and output tax, along with a payment of R30.

Sounds simple, right? Not entirely, here we’ve used a simple example to illustrate the basics of VAT. But in the real world, not all goods and services are classified as standard-rated supplies that attract VAT. There are also zero-rated and exempt supplies, which complicates things.

VAT nuances to know about

There may be instances where you won’t be able to charge output tax on the goods or services you sell, nor will you be able to deduct input tax for the expenses you incur. Let’s explore zero-rated and exempt supplies in the context of your eco-friendly bicycle business.

Zero-rated supplies

Your bicycles have gained international acclaim, and you’ve begun exporting them. Assuming a direct export arrangement – where you take full responsibility for delivering the bicycle to the buyer in another country – your bicycle would be classified as a zero-rated product, so you’d charge 0% VAT on your tax invoice.

Note that zero-rated supplies are still considered ‘taxable’ – we’ll make sense of this when we look at exempt supplies in the next section. The result is that, even though you’re charging 0% VAT on your bicycle, meaning you collect no output tax, you are still allowed to claim back the VAT you incurred (input tax) in its production.

Theoretically, if all the bicycles you produced were exported, SARS would probably owe you a VAT refund due to your input tax exceeding your output tax.

More generally, our government applies a zero-rating to certain goods and services, like basic food items, to bring down the living expenses of lower-income households.

Obviously, if you’re buying zero-rated supplies to make your bicycle, there won’t be any input tax for you to claim.

Exempt supplies

You’ve decided to change your bicycle business model to a hire-only proposition. As a result, your bicycles are now categorised as public transport (a stretch, but bear with us), making them exempt from VAT. Under the exempt classification, your bicycle is not considered a taxable supply.

While the net effect on your customer’s invoice is the same (you don’t add VAT), selling an exempt supply has one notable difference: you are not permitted to claim the VAT you paid (input tax) to develop the bicycles for hire. In essence, if your business only sells exempt supplies, you won’t be allowed to register for VAT.

Other examples of VAT-exempt goods and services include non-fee-related financial services, educational and training services, charitable fundraising events, residential rental accommodation, and the selling, leasing, and letting of commercial property.

When should you register for VAT?

In the first years of your business, you’ll want to focus on providing an excellent service or product. So, for many budding businesses, registering for VAT is often undesirable. The accompanying administrative responsibilities – like submitting monthly VAT returns – detract from developing the core business product.

The VAT legislation provides some relief in this regard. Your small business is only required to register for VAT if the taxable supplies made or to be made, is over R1 million in any consecutive twelve-month period.

But there are certain instances where you might want to register for VAT voluntarily – the only prerequisite being that taxable supplies made in the past period of twelve months exceeded R50 000.

Some of the primary reasons you may consider voluntarily registering as a VAT vendor include:

  1. Your business sells mostly zero-rated supplies. Remember that you’ll still be able to claim back the VAT on the standard-rated supplies you buy to make your zero-rated product or service. And with no output tax, you may qualify for a VAT refund from SARS.
  2. Large capital expenditure is necessary. If your business needs to buy vehicles, equipment, or property, you’ll need a substantial deposit. Being a VAT vendor, you can claim back the VAT charged on those items.

It’s worth reiterating that if your business sells exempt supplies, you will not be allowed to register for VAT, nor will you be able to claim any input tax from SARS. You’ll need to set your product/service price to account for the non-refundable input tax you’ll incur.

Basic VAT do’s and don’ts

Here is a list of basic rules once you become a VAT vendor:

  • Find out which VAT cycle applies to your business and submit your VAT return and payment within 25 days of the end of your cycle.
  • Late VAT submissions and payments attract penalties and interest on the amount owed, so don’t leave the work to the last minute.
  • Include a VAT line item on all your quotes and invoices, even if the supply is classified as zero-rated (this won’t change the final selling price).
  • Make sure the words ‘Tax Invoice’ appear on every invoice.
  • Be extra cautious not to inflate your input tax claims to reduce your VAT liability – this is illegal.
  • Make sure that the revenue you report in your financial statements matches the revenue you’ve declared on your VAT returns.
  • Always submit your VAT returns, even if there’s no VAT due to SARS.
  • All your invoices must include your VAT number and that of your customer if they are a registered VAT vendor. You must also include their name and physical address.
  • VAT must be charged on any commissions earned or paid.
  • If you have an irrecoverable bad debt that’s been written off, you can claim back any VAT already paid to SARS for the invoice in question.