In the current economic landscape Small and Medium Enterprises (SMEs) should constantly look for ways to reduce operating costs and use the savings to cater for unforeseen business expenses. Managing tax in a small businesses is a challenge, but there are ways in which entrepreneurs can manage costs by improving tax efficiencies. Two forms of tax that has the most impact on small business are Income Tax and Value-Added Tax (VAT). Administering Employer’s Tax can also be very time-consuming.
Income Tax of 10% is payable to SARS for business with a profit of between R43 000 and R300 000, whereas larger companies could pay up to 28%. Small businesses with a turnover of less than R1million can choose not to pay tax on profit, but instead pay tax on turnover. This means that there is less need for formal filing, slips and record keeping. It is however not recommended for start-up businesses to choose turnover tax, because it is likely that your business would not make a profit in the first few years of starting out, which means that no tax will be payable.
Provisional tax is a system used by SARS that caters to companies who earn an uneven income. Provisional tax simply allows you to pay income tax three times in a financial year instead of one large lump sum at the end of the financial year.
Knowing which exemptions your business qualifies for is one of the steps to making your business save on taxes. Small businesses qualify for a number of exemptions from SARS depending on the size of the business and the annual turnover bracket.
If your business has a turnover of less than R1 million per annum, you can choose not to register for VAT and in doing so, skip almost all the paperwork that is required by SARS. VAT charged by one vendor to another on goods or services that is acquired for business will qualify as input tax in the hands of the recipient. Typical examples of expenses that may be deducted are: trading stock,raw materials, water, electricity and telephone charges, administrative overheads such as audit and accounting fees, marketing and advertising expenditure, delivery vehicles, rental charges for office space or for factory premises, production machinery and maintenance expenses, fees charged by VAT registered consultants and other independent contractors except for salaries and wages of employees.
Capital gains tax (CGT) is applicable where businesses and individuals are taxed on value increases of capital items such as property. This means that they have to pay GCT once your business disposes of any asset/s. When you dispose of any asset you can deduct capital losses from any capital gains made and only 50% of the capital gain is added to its taxable income. This is known as the inclusion rate.
Employee Tax is a type of tax that employers administer on their employees on behalf of SARS. Small businesses that specialise in project work often make use of temporary workers. Employers need to understand that there are temporary tax rate on employees on different salary brackets to avoid mistakes and fines from SARS.
Small businesses should keep record of all expenses regardless of the value. SARS provides deductions for a range of business expenses such as travelling, electricity cost and common office expenses, amongst others.
Many business owners try to save costs by being a ‘Jack of all trades’, handling everything themselves. This often results in costly financial and tax mistakes which could have been avoided by using qualified accountants or tax professionals. If start-up businesses cannot afford to hire accountants, they can use credible online financial tools offered by their bank or financial institutions to save money.
Using your home as business premises can benefit you from certain tax deductions, such as interest payment on the bond and daily expenses required from running a business.
By keeping these guidelines in mind, will help you save on unforeseen costs.