Directors: Fighting Corruption via Your Social and Ethics Committee

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“South Africa has lost R700 billion to corruption over the last 20 years” (Institute of Internal Auditors)

The Companies Act requires a company to set up a Social and Ethics Committee if it is:

  • A listed company
  • A state owned entity
  • A company with a public interest score of over 500 in two of the last five years.

Social and Ethics Committees have a broad mandate to reduce corruption, to ensure that B-BBEE and Employment Equity Act programs are compliant with legislation, to be a good corporate citizen uplifting society around them and to ensure all employees are treated fairly and equitably.

The Companies and Intellectual Property Commission (CIPC) is empowered to issue guidelines and practice notes on aspects of the Companies Act.

The CIPC guideline

The purpose of this guideline is to get companies to actively fight corruption and to set up a Corporate Compliance Program along the lines of the OECD (Organisation for Economic Co-operation and Development) Recommendation on corruption.

This initiative of the CIPC is a response to State Capture and to corruption scandals in the private sector. Corruption is becoming endemic in our society and can only be turned back and stopped by a comprehensive program.

The compliance program

  1. The starting point is commitment from top management to instil into the culture of the company that corruption is unacceptable across the organisation. Senior management should ensure that the Compliance Program is communicated on an ongoing basis to all stakeholders.
  2. A risk-based approach should be used to identify all potential corruption risks and on a continual basis manage these risks throughout the company.  A database of all information gathered should be continually fed back to staff and stakeholders, and shared with other organisations fighting corruption.

    All activities in the company should be undertaken with the risk management process underpinning these processes.

  3. An ongoing due diligence program should verify who the company is dealing with.
  4. Policies and procedures should be implemented and these should be clear-cut and easy to understand.
  5. Compliance training is to be undertaken and all staff and key stakeholders included in the training.
  6. Whistle blowing is to be actively encouraged and separate channels should be set up for whistle blowers to communicate any wrongdoing they become aware of. Whistleblowers need to be protected against reprisals and victimisation.
  7. A high level of auditing and investigative capacity needs to be implemented. Corruption, as we know, needs to be continuously attacked until it is completely uprooted.

We are all losers when it comes to corruption, so even if your business isn’t required to form a Social and Ethics Committee, consider what steps you can take to fight it.

Finally, don’t just follow the law and think that is enough. Those implicated in State Capture or private sector malfeasance protest they have broken no laws. Equally important is to practise good governance by implementing transparent and ethical norms.

Small Businesses: Reap the Benefits of Cashless Transactions

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“Mobile devices, high-speed data communication, and online commerce are creating expectations that convenient, secure, real-time payment and banking capabilities should be available whenever and wherever they are needed” (Chair of the Federal Reserve of the United States, Jerome Powell)

South Africa is already a cash-heavy economy as it is and this reliance on cash is financially and socially costly for the economy. This cost alone is estimated at approximately R88 billion per year. This number is calculated by the Payments Association of South Africa (PASA) and is derived from consolidating the costs to consumers, businesses, banks and the SARB and is made up of both direct financial and indirect social costs. “The direct financial costs primarily relate to transactional fees incurred by end-users, the costs of printing cash, the supply of cash, and the maintenance of the expensive cash infrastructure (ATM’s, branches and cash centres). The social indirect costs relate to unnoticed factors like time wastage, investment opportunity lost, inflation, crime and others”, according to the Association.

“Fintech” solutions such as tap-to-pay, interbank instant deposits, eWallet, PayPal, Snapscan, Zapper continue to grow in popularity, primarily because of considerations around minimising exposure to Covid-19 and social distancing. 61% of respondents interviewed during the survey cited social distancing as a driver for digital commerce.

General Manager at Business Partners Limited, Jeremy Lang says “In this new ‘less-cash’ society, the worst thing that any SME can say to a customer is, ‘I don’t accept that method of payment.’ This means that South African businesses are under significant pressure to adapt and evolve their mentality towards digitisation. It is a change for the better, for a number of reasons and we urge all SMEs to get onboard and use digitisation as a way of establishing a competitive advantage going forward.”

Cashless transactions come with the following benefits:

  1. Increased safety

    Cash exposes the user to higher risk due to the physical exposure to a third party. There is a high risk in holding cash, where users are at risk of theft and leakage. In the current Covid-19 environment, the less contact with cash the better due to safety reasons.
  2. Cashless is more convenient

    Another major appeal in cashless commerce is the convenience of having your “money” in a central depositary that you have access to at any location and time, without having to physically count it.
  3. SMEs can keep better records of their transactions

    A paper trail of every digital transaction lives in a cloud – and can therefore be accessed by either the account holder or the financial service provider should there be a need to reference the transaction in future.
  4. “Cash Is Expensive for South Africa”

    This is according to the Payments Association of South Africa. In its “Modernised Real-time Electronic Retail Payments: A Case for Change for South Africa” report, there is a Cost of Cash to Businesses section, which states that “when assessing the cost of accepting payments for businesses, cash is largely perceived as cheaper than card-based payments (POS and QR codes).”

    “However, businesses often do not account for all the costs associated with accepting cash payments (e.g. the risk of theft, leakages, infrastructure costs for safes, tellers etc.) over and above the costs associated with depositing this cash. On average, for smaller businesses, cash deposit fees are about 1.5% including the fixed base costs, which is significantly lower than the average merchant service fees (MSF) for accepting card payments. However, if we include the indirect costs of cash acceptance utilising the same proportion of indirect costs for the cost of cash to consumers, then the true cost of cash for businesses increases to approximately 3.4% for small businesses,” it clarifies.

Take professional advice on the best and safest ways to take advantage of the cashless transactions trend.

Your Tax Deadlines for September 2021

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  • 07 September – Monthly Pay-As-You-Earn (PAYE) submissions and payments
  • 23 September – Value-Added Tax (VAT) manual submissions and payments
  • 29 September – Excise Duty payments
  • 30 September – Corporate Income Tax (CIT) Provisional Tax payments where applicable
  • 30 September – End of the 2nd Financial Quarter
  • 30 September – Personal Income Tax (PIT) top-up Provisional Tax payments.

The Top 5 Leadership Skills Every Entrepreneur Needs

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“The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails.” (John Maxwell)

To be a good leader in the small business environment a person needs to possess a variety of skills, understand themselves and recognise areas where there is room for improvement. The leader’s abilities will be the main driver for growing the business. An effective leader is required to not only guide a company from a financial perspective, but also to build a team that is accountable and designed to get results. On the surface this sounds like a simple statement, but here are the five main skills that it takes to develop that end goal.

1.Motivation

Leadership is not just about charting the right business course. At the end of the day, profit and loss will be determined by the strength of the team working in the company and by how motivated they are to do their very best.

A recent study conducted by Dr Kou Murayama at the University of Reading found that when people are motivated, they learn better and remember more of what they have learned.

Great business leaders are capable of establishing a positive culture in their organisation, and to do that they need to lead from the front. A true leader needs to exemplify the values they want to instil in their employees and motivates their team through their passion and accountability. That said, a leader cannot believe that they alone will be able to inspire their employees to greatness and they should not diminish the value of rewards in motivation. Simply adequately rewarding your team with good salaries and other non-monetary bonuses and offers can inspire them to do better work.

According to recent findings in a cognitive neuroscientific study by Adcock, Thangavel, Whitfield-Gabrielli, Knutson & Gabrieli, rewards enhance learning, focus and enthusiasm due to the modulation of hippocampal function by the reward network in the brain.

Motivation then is a blend of the character of the leader, the culture within the company and the rewards being offered in return for effective and productive employees. A good leader needs to take all that into account to get the most from their team.

According to Kara Kelly, Executive Director of CompleteContents.com, “Leadership is not about who is in charge. It’s about making sure your team stays focused on the goals, keeping them motivated and helping them be the best they can be to achieve those goals. This is especially true when the risks are high and the consequences matter.”

2. Communication

Good, honest communication with both employees and clients is one of the key pillars to small business success. The leader is the one primarily responsible for developing a good communication system and culture within the organisation and for ensuring employees are able to effectively communicate the necessary information, opportunities and problems they perceive to the right people, quickly and easily. Forbes reports that one of the simplest ways new businesses collapse is through either a lack of communication or through too high a complexity level of communication.

Employees should feel empowered to communicate directly with those in charge if they perceive problems or notice opportunities and should be rewarded for doing so, and feedback to both employees and clients should be frequent and simple.

A bad communication system is one that generates numerous, complex reports that have to travel through a chain of command before it reaches the right person. Leaders should focus on being accessible, communicating more simply and more often to ensure all parties are fully aware of what needs to happen, and the details associated with it. Your lowest level employees and clients don’t need 60 page reports filled with complex graphs and algorithms explaining what you are going to do– a quick message to outline targets and how they will be achieved, by which deadline is far more effective.

3. Passion

The best leaders are absolutely passionate about what they do and their company as it’s impossible to become successful at something that one does not care about. Before starting an endeavour a business leader needs to seriously ask themselves if what they are doing is something they are passionate about. The early years of a business are filled with grind, difficulty and setbacks and tackling all this without passion for what you are doing is close to impossible.

Passion for a business also has numerous other positive side effects for it such as drawing the right consumers, building networks with similarly minded individuals, and creating authenticity that your audience (suppliers, customers and employees) will identify with.

But obviously not all businesses are born out of passion for the product. Not many plumbers for example will say that the one thing they always wanted to do when they left school was work with pipes and bathroom fittings! These leaders find their passion in other places and inspire themselves by perhaps knowing that they are providing necessary and helpful services to people in need, that they are doing good, providing for their families or giving themselves, and their employees, the kind of lifestyles they all really want. Finding genuine passion for your business, from whichever source, will ultimately be one of the biggest factors in also discovering success.

4. Interview Skills

In the early days of a business being able to find and recruit true talent can make or break a company. An entrepreneur needs to be their own Human Resources department and discovering and nurturing true talent is therefore absolutely essential. Finding the right candidates begins when determining what kind of candidate is truly needed in the company. All too many job adverts claim to want someone who is a “copywriter, graphic designer and SEO specialist, who dabbles in social media and has three years agency marketing experience”. These adverts show a clear lack of leadership in the company, because unicorns with that kind of diverse experience are extremely rare, and clearly the roles the company really needs filled have not been considered carefully enough.

Defining exactly what it is a company needs will allow the entrepreneur to advertise the position effectively, remunerate fairly and therefore attract the right kind of person into the role.

After attracting the right candidates to an interview, the intelligent small business employer will then focus on a few key things at the interview stage. Interviews should focus on “behaviour based interviewing” or interviews that focus on examples of past behaviour and achievements. What the interviewer is looking for is someone who can effectively work and deliver unsupervised as they won’t have the capacity to watch over that employee 24/7. A good trick is to send in someone you trust to have a casual chat with the employee while they are waiting for their interview, or when you need to “step out” for a few minutes. This employee will be more likely to get a sense for how the person really is and determine if there is good chemistry.

Understanding a potential hire’s motivations for taking a job is also critical. You need to know this person is as passionate as you are about making your company work and isn’t just in it for the money or, looking to fill a short-term role. In the end, you want to ensure whoever you hire will be there a few years to limit the necessary training and wasted time and expense employee churn can create.

5.Education and personal development

People who choose to go into business for themselves usually do so for a number of reasons that range from years spent in an industry, to having a good idea, or simply wanting to try something new. Whatever the reasons it’s safe to say that the skills they have at the start of the business are usually not the ones they are going to need in the future as the company grows and expands. A crucial aspect of building a successful business is in the entrepreneur making sure that they are as qualified as possible to meet the upcoming challenges of the company and planning ahead so they aren’t caught off guard.

It is therefore essential that any business leader, but particularly those in start-ups, continue to educate themselves on their industry and in business. The more skills a leader has, and the more they understand their company, legislation affecting their industry, new developments and the competition, the more chance they have of making it to the end game. The answer is simple, never stop learning, and encourage a culture in which this is true of each employee in your business.

As John F. Kennedy said, “Leadership and learning are indispensable to each other.”

Business Combinations: A Path to Exponential Growth and Profitability?

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“If everyone is moving forward together, then success takes care of itself” (Henry Ford)

Initiating, setting up and launching a new, typically, small business is a challenge and can be a lonely journey to growth and, hopefully, success.

Could developing a partnership or co-operative with like businesses be a pathway to growth and profitability?

 How do you describe your business?

Truly understanding how to properly describe what your business is can make the difference between success and failure. This is an important consideration for both the entrepreneur and potential customers. Is a company that uses a truck(s)/bakkie(s) to move goods around simply a moving company or is it in reality a logistics organisation offering a range of transporting options? A proper description can put what the organisation really is in proper perspective for those who are looking for a supplier of goods or services.

Next, ask yourself “Are there other products or services that relate to what my business does and should we pool our resources?”


The story of a plumber and how he grew his business

Consider, for example, the construction industry. Not the big guys but those who supply into that industry. Tradesmen such as plumbers, carpenters, electricians, painters, plasterers and so on.

Some years ago a plumber who had a good reputation (an essential element) for both the quality and timing of his work wanted to grow and develop the operation. He had a team working with him but found it difficult to scale up the business.

Because of his standing (reputation) in both the residential and commercial construction industry, he had been asked, from time to time, to recommend other tradesmen of similar quality. He turned those requests into a growth business. He approached the artisans he had worked with who had proved to be reliable and for whom he had a good regard and suggested they join his business. He explained how it would work.

He would find the work for them and refer them to the client. This was in respect of all the trades servicing and supplying the industry. He took a small percentage of the fee/charge for the following benefits he offered these tradesmen:

  • Work sourcing,
  • Administration for them (and their teams if they were more than ‘one-man bands’),
  • Handling all the finances, banking, submission of regulatory returns,
  • Sourcing of supplies for them where necessary,
  • Managing their payrolls and attendant administration,
  • Other issues.

Of course, there was a simple written agreement between his little company and those who contracted with his business.

 The consequences of this “pooling” of talents and services

  • His business grew in influence, reach and demand as its reputation grew,
  • There was a growing demand from tradesmen to join his operation, and he was able to be selective in deciding with whom he would develop relationships,
  • Because of the aggregation of supplies he sourced he was able to obtain quantity discounts. He retained part of these savings which went to meet the costs of his business with the balance being passed on to the tradesmen contracted to his operation,
  • The individuals who contracted with his business were able to scale up their operations as they were introduced to suitable lucrative and reliable contacts who paid their bills on time and in full,
  • Eventually, some decided to go on their own. This was always his expectation, that once they were on a sound footing they would develop their own operations further,
  • He was able to turn his full attention to growing the broader operations even though he kept his hand in his original plumbing operations,
  • Finally, he was never greedy and kept his focus on growing both his and his cooperative partners’ businesses.

His operation grew exponentially and after many years he retired a well-off man who had the satisfaction of having contributed to the well-being and success of others in a tough industry.

What do you need to consider?

Once you have determined exactly what your business really can be described as, consider whether there are any other businesses that relate more or less naturally to your operations.

Is there an opportunity for you to ramp up your operations to offer relevant services to these businesses to grow both their and your operations and provide your business with additional income streams?

The construction industry example used here is but one where collaboration could lead to growth and improved performance and income generation.

SMEs and Microinsurance: Benefits and Risks

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“Do you know the difference between education and experience? Education is when you read the fine print; experience is what you get when you don’t” (American singer and social activist, Pete Seeger)

Microinsurance refers to an area of cover made accessible to low-income individuals and businesses at relatively low cost. Within the South African context, they originally dealt heavily with funeral insurance. Since 1 July 2018, in terms of the Insurance Act of 2017, microinsurers were allowed to offer additional product offerings.

The Insurance Act introduced a new microinsurance license category. Now microinsurers may be profit-making, not-for-profit or co-operatives. This has brought stability to the sector and even opened up the market, and extended the list of options.

Legislation included a time cap on contract terms of 12 months for life insurance and a “No Waiting Periods” law for policies covering accidental death or disability, as well as credit risk policies.

The importance of the microinsurance sector for local SMEs

A South African Microinsurance Case-Study, which was conducted by the University of the Western Cape (UWC) for the International Labour Organisation, surveyed SME operators to assess the risks that they face and then explored the possibility of insuring those risks.

It concluded that “there is an important, albeit limited, role for microinsurance (especially life insurance)” among SMEs. The case study assessed the risks SMEs face in totality, from operational to employee benefits.

The avoidable financial risks negligent SMEs face

Given the many companies advertising funeral cover, employees of SMEs should first find out if such cover is offered as an employee benefit to avoid making unnecessary contributions to their own policies given the payout caps in the event of a claim.

Accordingly, SMEs which contribute to their employees’ life insurance and/or funeral policies as benefits, run the risk of wasting money should they not fully understand the regulations relating to these policies. This should be fully discussed with employees as the impact of the R100 000 cap on life and/or funeral cover affects SMEs which offer these employee benefits directly to staff. For example, if an employee is covered by multiple funeral policies and a claim is filed, the insurers will scrimmage and divide the R100 000 cap liability among themselves. Regardless of the policies’ individual values, not a single rand will be paid beyond that amount.

These are usually taken out as group covers. Communicating with employees is vital as there is no need for multiple funeral policies if the R100 000 aggregate sum is reached.

Advantages of using microinsurance over traditional insurance

  • They provide cover at lower premiums.
  • No exclusion is allowed due to pre-existing health conditions for funeral and credit life insurance policies.
  • Excesses only concern the non-life insurance policies.
  • Authorisation and payment of claims are not allowed to take more than two business days.
  • SMEs that have microinsurance cover for employees have them as group schemes with less admin and red tape as compared to traditional insurance.

Disadvantages of using microinsurance

  • Many microinsurance schemes are said to have relatively poor viability and sustainability, so products require more scrutiny in order to be considered safe.
  • SMEs need to be aware of the cap of R100 000 maximum payout in the life and funeral insurance category and the R300 000 cap in the non-life category.
  • Products are usually not comprehensive in the non-life category.

Seek professional assistance to find the best microinsurance options available in order to avoid being trapped by the fine print.

Emergency Tax Relief: Is Your Business Eligible and What Should You Consider?

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“SARS will implement these tax relief measures because compliant taxpayers have paid their fair share of tax, making it possible for government to provide such a temporary safety net in a time of extreme difficulty” (SARS)

Battered by national lockdowns of varying intensity since March last year, many businesses have been further affected by weeks of looting and riots in July. These cost 330 South Africans their lives, while our country lost about R50 billion in output, with an estimated 50,000 informal traders and 40,000 businesses affected, placing 150,000 jobs at risk.

For some businesses who had managed to survive in an economy that contracted by 7% last year, it was a final blow. In the economic hubs of Gauteng and KwaZulu-Natal, businesses, shops and warehouses were destroyed or shut down. Virtually all businesses across the country – and in neighbouring countries – were impacted by the resulting food, fuel and medical supply shortages, as well as disruption of supply chains when the ports of Durban and Richards Bay were brought to a standstill and the N3 highway was closed.

In response, on 25 July 2021, President Ramaphosa announced emergency tax measures to assist those affected by the riots and looting.

Three tax relief measures offered

  1. A tax subsidy of up to R750 per month, for four months, per employee earning below R6,500 – 1 August 2021 to 30 November 2021 – under the current Employment Tax Incentive (ETI) for private sector employers. The first extended ETI can be claimed in your August EMP201 (due 7 September). SARS will pay monthly ETI refunds for the four-month period commencing on 13 September, subject to verification or audit steps required.

  2. Deferral of 35% of Pay–As-You-Earn (PAYE) liabilities over the three months – 1 August 2021 to 31 October 2021, without penalties or interest. The first deferment can be claimed on the August 2021 EMP201 return, due 7 September. After 7 November, SARS will determine the four equal payments for the total amount that you have deferred and include it in your monthly Statement of Account. Payments will be made over a four-month period that will commence on 7 December 2021 with the last payment due by 7 March 2022.

  3. Deferral of excise duty payments for up to three months for businesses in the alcohol sector.

    Note that this deferral is available immediately.

What are the qualifying criteria?

  • Only tax compliant companies qualify for the emergency tax measures and that means the business:
    • Is registered for all required taxes.
    • Has no outstanding returns for any taxes it is registered for.
    • Has no outstanding debt for any taxes it is registered for, excluding instalment payment arrangements, compromise of tax debt, and payment of tax suspended pending objection or appeal.
  • The employer must be registered with the South African Revenue Service (SARS) as an employer by 25 June 2021.
  • The employee tax subsidy applies to tax compliant private sector employers with employees earning below R6,500 per month.
  • PAYE deferrals apply to tax compliant businesses with a gross income of up to R100 million, with a limitation that gross income should not include more than 20% of income derived from specific listed sources.
  • Excise duty payments deferrals apply to compliant licensees in the alcohol sector that have applied to SARS.

Issues to consider

  • You are responsible – The law holds an employer personally liable for an amount of tax withheld and not paid to SARS, or which should have been withheld but was not withheld. The employer could also be held criminally liable for failure to withhold and pay PAYE.
  • SARS’s focus on employers – Just weeks ago SARS announced it has teamed up with the NPA (National Prosecuting Authority of South Africa) to deal with tax non-compliance, initially focussing on non-compliant employers. SARS’ Criminal Investigations Division has already handed over 30 non-compliant employers to the NPA in their new joint venture.
  • Mistakes are costly – While previously a mistake made by a taxpayer was only a crime when it was done “wilfully and without just cause”, taxpayers can now in certain cases be convicted of an imprisonable criminal offence even if non-compliance was due to negligence or ignorance. If you decide to implement the relief measures, call in professional assistance from your accountant to ensure accuracy and recordkeeping.
  • We’ve been warned – Before announcing the details of these emergency tax relief measures, SARS Commissioner Edward Kieswetter made it clear that SARS has the capability to detect and make it costly for those that are non-compliant with their legal obligations and engage in criminal malfeasance. Get a professional opinion to ensure your company qualifies and that the relief is correctly claimed.
  • Expect a verification or audit from SARS – ETI refunds will be subject to any verification or audit steps that may be required. Your accountant can assist you in preparing for the likelihood of verifications and audits, and in successfully completing a verification or audit when selected.
  • Will you have recovered sufficiently in three months? Three months is a very short time in these unpredictable times. The ability to recover during the grace period is an important consideration: the company’s cash flow will improve initially, but after the three-month deferred payment period, an even higher PAYE liability is due – over the year-end and into the next financial year. Your accountant can help you to carefully project your financial position over the coming months to enable an informed decision.
  • Can you afford the deferred tax repayments? While the lower PAYE payments for the three months of August, September and October will provide short-term cashflow relief, one quarter of the total deferred amount must be paid – on top of the company’s normal PAYE obligation for each month between November (due 7 December 2021) and February (due 7 March 2022). If your payment is made late, you will forfeit the benefit of the tax relief for PAYE and SARS will impose penalties and interest on the calculated total payable. It will also create other challenges, such as not being able to obtain a tax clearance certificate required for loan applications and tenders.

While these tax measures introduced for employers may be a lifeline for some companies to survive, all businesses are well advised to call on the advice and assistance of their accountant, both when carefully considering the decision to take up this tax relief and in claiming the tax relief.

Your Tax Deadlines for August 2021

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  • 7 August – Monthly Pay-As-You-Earn (PAYE) submissions and payments
  • 25 August – Value-Added Tax (VAT) manual submissions and payments
  • 30 August – Corporate Income Tax (CIT) Provisional Tax Payments, where applicable
  • 30 August – Excise Duty Payments
  • 30 August – Personal Income Tax (PIT) Provisional Tax Payments

Audit Your Employee Taxes, Before SARS Does

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“One of our strategic objectives is to make it easy for taxpayers to comply with their tax obligations, and hard and costly for those who willfully do not comply” (Edward Kieswetter, SARS Commissioner)

Earlier this year, SARS and the NPA (National Prosecuting Authority of South Africa) announced that they are joining up to deal with tax non-compliance, initially focussing on employers.

Employers under intensified scrutiny

While this enhanced collaboration covers a number of aspects, the immediate focus will be non-compliance by employers, who deduct employee taxes and levies, never turn those taxes over to SARS, and do not file their returns when required, as well as “other general corrupt activities”.

To enable the collaboration, the Criminal Investigations Division within SARS will allocate dedicated capacity and work closely with the NPA in its Specialised Tax Units (STUs). Solid cases ready for prosecution will be prepared in a coordinated manner across the country. The SARS regional leaders in criminal investigations and the NPA regional directors of the STUs will enrol these cases on a specific date for each region.

Why audit your employees’ tax?

The Tax Administration Act holds an employer liable for an amount of tax withheld and not paid to SARS, or which should have been withheld but was not withheld. The employer could also be held criminally liable for failure to withhold and pay PAYE.

SARS’ Criminal Investigations Division has already handed over 30 non-compliant employers to the NPA in their new joint venture and are working to identify and prioritise more cases.

They are further enabled by recent changes to the tax laws that effectively lowered the threshold for criminally prosecuting taxpayers through removing the requirement to prove that the taxpayer’s conduct was “wilful and without just cause” for selected offences. While previously a mistake made by a taxpayer was only a crime when it was done “wilfully and without just cause”, taxpayers can now in certain cases be convicted of an imprisonable criminal offence even if non-compliance was due to negligence or ignorance. Offenses include, among others, failure to submit a return when required to do so; failure to retain all relevant substantiating records; failure to provide any information requested by SARS; or failure to disclose any material information to SARS.

This, along with SARS’ and the NPA’s intensified focus on employers, as well as SARS’ increased abilities to draw taxpayer information from third parties, make an employee tax audit a necessity.

It also protects employees. Employees’ tax is not a separate form of tax, but rather an amount that the employer is obliged to withhold in respect of the employee’s liability for normal tax. On assessment annually, the employee’s tax withheld is set off against the employee’s liability for normal tax. The correct calculations and deductions will certainly help protect employees from unexpected surprises on assessment, and will also ensure that the employer’s processes are not the cause of disputes or delays when, for example, an employee needs to claim UIF.

How to audit your employees’ tax

  • An employee tax audit is a deliberate process undertaken to review payroll taxes and records, with the intention of ensuring accuracy to protect your employees as well as to comply with regulations. It is also an important part of a payroll audit.
  • Verify the employee information on your payroll: Do you have the required information for each employee in respect of identifying and calculating the applicable taxes, rebates and more? For example, the employment relationship affects the classification of an employee, which in turn determines the tax rate that must be applied.
  • Verify and review the remuneration for each employee: Remuneration, whether in cash or otherwise, includes any wage, salary, overtime, bonus, voluntary award, leave encashment, fee, stipend, commission, gratuity, pension, emolument, annuity, allowance, lump sum benefit payment, director’s remuneration, etc. Can the remuneration be structured more tax efficiently for the employee?
  • Verify that the correct taxes and levies are deducted:
    • Pay As You Earn (PAYE) must be withheld from the remuneration paid to employees, subject to thresholds and rebates.
    • Unemployment Insurance Fund (UIF) contributions, for which the monthly threshold recently (1 March) increased from a maximum of R14,872 pm (R178,464 pa) to R17,712 pm (R212,544 pa).
    • Skills Development Levy (SDL) is payable by employers with a payroll of more than R500,000 pa.
    • Employment Tax Incentive (ETI) rebates incentivise employers to employ young workers – if your company has taken advantage of the ETI rebate, these tax deductions should be verified in respect of each qualifying employee.
  • Verify that the correct amounts are deducted: Both over deductions and under deductions as well as any corrections to submitted returns will certainly flag your employee tax account at SARS for audit.
    • Make sure the correct tax rate is used to withhold the correct PAYE taxes from each employee’s wages, verifying that all tax thresholds, rebates, directives, tax credits, deductions, benefits, exemptions, contributions and allowances have been considered and correctly applied where appropriate.
    • UIF is calculated at a rate of 2% of remuneration (1% employee and 1% employer contribution).
    • SDL is calculated at a rate of 1% of total remuneration paid to employees, excluding certain payments such as reimbursements or severance benefits.
    • The ETI allows “eligible employers” of “qualifying employees”, subject to specific criteria, to claim a rebate with a maximum value of R1,000 per month for employees earning up to R4,500 per month, with the rebate tapering to zero at the maximum monthly remuneration of R6,500. The ETI was recently extended to February 2029 and should be considered with the assistance and advice of your accountant. Employers will be able to claim the incentive for a 24 qualifying month period for all employees who qualify.
  • Verify that the deducted amounts are correctly declared and remitted: The employees’ taxes and levies deducted from an employee’s remuneration must be declared on the Monthly Employer Declaration (EMP201) return and paid to SARS within seven days after the month end, or the previous working day if the seventh day is on a weekend or holiday. Late filing is subject to newly-introduced penalties, and late payments are subject to an immediate penalty of 10% and interest at the prescribed rate will be charged monthly on the outstanding amount.
  • Employment Taxes Validation – IRP5 Certificates: An employer must furnish employees from whom employees’ tax was deducted with an IRP5 certificate, within the prescribed tax period. From the 2020 year of assessment, SARS is performing tax calculations on the IRP5/IT3(a) certificates. Where the incorrect amount of tax was deducted from the employee, a letter will be issued to the employer.
  • Verify compliant employee record keeping: Employers must keep a number of specified records for each employee for a period of five (5) years and make them available for scrutiny by the Commissioner.
  • Schedule regular employees’ tax audits: Ideally, employers should conduct a payroll and employees’ tax audit on a routine basis and certainly any time there are changes in the tax regime, the labour laws, in the business or in its internal processes.
  • Professional processes: Much of a business’ employee tax risk can be mitigated by putting professional processes in place. Invest in SARS-compliant automated payroll software with training for the relevant staff members and regular legal updates; or outsource your payroll and its taxes to professionals such as your accountant or even a payroll specialist.

Alternative Funding for Your Small Business

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“When looking for funding, don’t just look for cash. Look for the right people” (American fashion entrepreneur, Jodie Fox)

According to South African Reserve Bank data, the low level of small business financing appears to be emanating from the demand side as “the vast majority of SMEs indicate that they do not borrow from financial institutions, particularly banks”.

Statistics SA’s Annual Financial Statistics (AFS) recorded that “Industries in the South African formal business sector, and included in the AFS survey, generated R10,5 trillion in total turnover in the 2019 financial year. … A breakdown of turnover by business size shows that small businesses were responsible for generating R2,3 trillion (or 22%) of the R10,5 trillion.”

There are however alternative funding options for small businesses in general, rather than the conventional method of going to the banks.

Agency funding options

These are available to small businesses with the objective of meeting certain quotas, including gender, race, regional and industrial transformation.

Examples of agency funding programmes include:

  • National Empowerment Fund (NEF) services business loans from R250 000 to R75 million across a variety of industry sectors.
  • Small Enterprise Finance Agency (SEFA) has a programme called the Township and Rural Entrepreneurship Programme (TREP), among others, where it finances SMMEs in townships, rural areas and farms with R350 000. R300 000 is for equipment and R50 000 working capital in a form of a grant.
  • Department of Trade and Industry’s (DTI) mandate is economic enlargement and Black Economic Empowerment.
  • Isivande Women’s Fund is a BEE and gender equality programme that provides funding from R30 000 to R2 million.
  • The Small Enterprise Development Agency (SEDA)

Bootstrapping finance

Bootstrapping, also known as financial bootstrapping, describes a position in which an entrepreneur starts a company with little capital, relying on own funds rather than outside investments to build the business. Bootstrap financing techniques are often favoured by smaller businesses.

Crowd funding

Various crowd funding platforms are available online in South Africa, with the general touch points being a funding goal project description, audio visual presentation, rewards structures for backers, “jump starters” profiles and project deadlines.

The size of the crowdfunding market in South Africa is yet to be determined, even though regulators are said to still be trying to get a full understanding of the increasingly popular trend.

Although crowd funding is not specifically regulated in South Africa, certain activities may fall under various financial services regulatory provisions and legislation.

Crowd funding is also popular with crypto-assets managers, deriving from their common nature of surviving in a digital habitat.

Crowd funding classes are:

  • Debt-based crowd funding, which is basically a loan where the investors provide funding to the recipient, which is then repaid over time with interest.
  • Equity-based crowd funding, whereby the investors provide funding to a start-up company by subscribing for shares and these funders sign-up to only to receive dividends when the project becomes profitable.
  • Rewards-based crowd funding has characteristics of bartering as investors generally make an “investment” into a business with an undertaking that allows for them to receive goods or services in return for the funding once the business has been launched successfully.

Make space for a partner

Getting a business partner comes with both advantages and disadvantages and should not be embarked on without professional advice.