Filing taxes can be stressful and time-consuming at best, and small businesses are already in a tough spot this year. Individuals and businesses of all kinds face erratic cash flow and significant uncertainty, and tax compliance can become a problem.
There are a variety of reasons why companies go into debt with Sars. Some may be in the red due to late filing penalties, while others may not pay or only pay part after submitting their return. Sometimes the Sars amends an assessment after an audit or review, which creates debt. Owing money to Sars is not ideal, but companies can take steps to get it right.
Understanding debt is essential if your business hopes to avoid unpleasant surprises or additional penalties. Here are some tips for small businesses that owe money to Sars.
Understand the difference between deferment and commitment
There are two mechanisms that Sars has for people and companies that cannot pay the amount they owe: a deferred payment agreement and a commitment.
A deferral agreement is an agreement that a taxpayer enters into because they do not have the cash, but must pay the Sars immediately. Rather than simply not paying and incurring penalties and interest, or even jail time, they sign an agreement with Sars to extend the payment period. Usually this takes the form of equal monthly installments over a set period until the debt is paid. The debt is not forgiven, but the company has more time to pay it off.
A compromise, on the other hand, is an agreement in which the Sars extinguishes part or all of the taxpayer’s tax debt. This only happens in very unusual circumstances. If only a portion of the debt is canceled, the balance owed to Sars still needs to be paid off, possibly as part of a deferral agreement. A compromise agreement is only entered into when a taxpayer is in dire straits and has no alternative. If an agreement is reached, Sars will normally waive the penalties and interest.
The taxpayer is considered tax compliant in both agreements and will receive a clean Tax Settlement Certificate if required.
Qualify and request a deferral agreement
To qualify for a deferral agreement, the taxpayer must:
- You suffer from a lack of assets or liquidity that is reasonably certain to be remedied in the future.
- Anticipate income or other receipts that can be used to satisfy tax debt.
- Show that the prospects for an immediate collection activity are poor or uneconomic, but are likely to improve in the future.
- Show that the collection activity would be tough in terms of the survival of the individual or the business, and the deferral or payment arrangement is unlikely to harm tax collection.
- Provide the security that is necessary.
- Submit all pending returns
Learn more, visit Sars website. If you decide that a deferral arrangement is right for your business, work with your accountant to make sure you’re on the right track.
If your company makes a deferral agreement with Sars and then defaults, they will have defaulted on the agreement. The Sars will consider the contract null and void, will reinstate the penalties and interest, and the debt will be immediately collectible.
Rate and request an engagement
In order for Sars to award an undertaking on an outstanding tax debt, the company must reach out to them and be honest about:
- The fair value of the taxpayer’s assets.
- Description of potential leads and transactions
- The monetary value of any future rights that the taxpayer will waive
- Details of the parties related to the taxpayer
The Sars will consider both the taxpayer in question and whether a person in their fiduciary capacity could be liable for such taxes.
If the company is determined to be eligible for a compromise, a senior Sars official and the authorized public official sign a compromise agreement that sets out the following elements:
- The amount to be paid by the taxpayer in the total liquidation of the tax obligation.
- A commitment by the Sars to stop pursuing recovery of the tax due after the agreed settlement.
- The conditions to which the tax debt is committed
The conditions generally include a few important elements, including a requirement that the business commit to meeting future tax obligations and pay the tax debt as agreed. Otherwise, they would waive their right to specific existing or future tax benefits, such as loss carry-overs, deductions, credits, and refunds.
It is essential to be direct when dealing with Sars – lies by omission are still lies, and Sars is free to break the agreement if he discovers that the company misrepresented the truth in any way. If Sars breaks the deal, the total debt plus penalties and interest will be immediately reinstated.
If you think your business is eligible for an engagement with Sars, work with your accountant to start the process.
Don’t be an ostrich
It is very tempting to keep your head in the sand and withhold payments to Sars, but they will always catch up in the long run. Taxes will always be owed and severe penalties can apply when payments are missed or poorly paid.
By working with your accountant and using cloud platforms like Xero throughout the year, you can minimize the amount of preparation required to file your taxes. Instead of leaving it to the last minute, you will have all your numbers updated and expenses recorded in near real time. Throughout the year, you’ll benefit from excellent visibility into your business cash flow, and when tax season rolls around, exporting this data is easy.
For companies affected by Covid, debt management may be their only option. If you’re in that position, stay strong and work with your accountant to fix things. Getting your books in order and tackling your tax debt may not be much fun, but it is an important step in getting you back on the road to success.
Candice Mullins, CEO, The tax house.