Filing taxes can be stressful and time-consuming at the best of times, and this year small businesses are already in a tough spot, says Candice Mullins, managing director at The Tax House.
Individuals and businesses of all kinds face irregular cash flow and significant uncertainty, and remaining tax compliant may become an issue.
Mullins said there are a variety of reasons that businesses go into debt with the South African Revenue Service (SARS).
“Some may be pushed into the red due to penalties from late submission, while others may fail to pay or only pay part after they submit their return. SARS sometimes amends an assessment following an audit or review, which creates debt. Owing SARS money is not ideal, but businesses can take steps to make things right.”
The tax expert said that understanding debt is essential if your business hopes to avoid nasty surprises or additional penalties.
Mullins provides some advice for small businesses that owe SARS money.
Understand the difference between deferral and compromise
There are two mechanisms that SARS has for individuals and businesses that can’t settle the amount they owe: a deferred payment arrangement and compromise.
“A deferral arrangement is an arrangement that a taxpayer enters into because they don’t have the cash, but they need to pay SARS immediately. Instead of simply not paying and incurring penalties and interest – or even jail time – they sign an agreement with SARS to extend the payment period.
“This usually takes the form of equal monthly instalments for a certain period until the debt is repaid. The debt is not forgiven, but the business has a longer time to pay it off,” said Mullins.
A compromise, on the other hand, is an agreement where SARS extinguishes some or all of the tax debt owed by the taxpayer, the tax expert pointed out.
“This only happens under very unusual circumstances. If only some of the debt is written off, the balance owed to SARS still needs to be settled, possibly as part of a deferral arrangement. A compromise agreement is only entered into when a taxpayer is in a dire situation and has no alternative. If an agreement is reached, SARS will ordinarily waive penalties and interest.”
The taxpayer is considered tax compliant in both agreements and will receive a clean Tax Clearance Certificate if required, said Mullins.
Qualifying and applying for a deferral arrangement
To qualify for a deferral arrangement, Mullins said that the taxpayer must:
- Suffer from a lack of assets or liquidity which is reasonably certain to be remedied in the future;
- Anticipate income or other receipts which can be used to satisfy the tax debt;
- Show that prospects of immediate collection activity are poor or uneconomical but are likely to improve in the future;
- Show that collection activity would be harsh in terms of the individual’s or business’ survival, and the deferral or instalment agreement is unlikely to prejudice tax collection;
- Provide security as may be required;
- Submit all outstanding returns.
If your business makes a deferral agreement with SARS and then defaults, they will have broken the agreement, said Mullins. SARS will consider the contract null and void, they will reinstate the penalties and interest, and the debt will become collectable immediately, she said.
Qualifying and applying for a compromise
For SARS to grant a compromise on an outstanding tax debt, the business must approach them and be honest about:
- The fair value of the taxpayer’s assets;
- Description of any prospects and transactions;
- The monetary value of any future right the taxpayer will forgo;
- Details of any connected parties to the taxpayer.
Mullins said that SARS will consider both the taxpayer concerned and whether a person in their fiduciary capacity could be liable for such taxes.
If the business is determined to be suitable for compromise, a senior SARS official and the authorised public officer then sign a compromise agreement setting out the following items:
- The amount payable by the taxpayer in full settlement of the tax liability;
- An undertaking by SARS to cease pursuing recovery of the tax owing after an agreed settlement is made;
- The conditions subject to which the tax debt is compromised.
“The conditions usually include a few important elements, including a requirement that the business agrees to comply with future tax obligations and that they pay the tax debt as agreed. Failing this, they would relinquish their right to specified existing or future tax benefits like carryovers of losses, deductions, credits, and rebates,” said Mullins.
“It’s essential to be straightforward when dealing with SARS: lies of omission are still lies, and SARS is free to break the agreement if they find that the business misrepresented the truth in any way. If SARS cuts off the agreement, the full debt plus penalties and interest will immediately be reinstated.”
Don’t be an ostrich
Mullins said that it is very tempting to keep your head in the sand and hold back payments to SARS, but they will always catch up to you in the long run, and harsh penalties can be applied where payments are missed or underpaid.