SARS Tax Audit risks facing small and micro businesses and sole traders

By Alison Haupt

There is a widespread illusion amongst small and micro business owners that their businesses are too small to warrant SARS auditing them. Their unsupported belief is that there is far more tax money to be found in large companies who can afford the resources to use complex schemes to evade or avoid tax.  Many business owners justify this belief on the fact that they have never been audited by SARS, so why should SARS do so now?

The release of the Annual Performance Plan for the 2017/2018 developed by the Executive Committee of the South African Revenue Services points to the brutal reality that the highest rate of tax non-compliance falls within the Small, Medium and Micro Entities (SMME’s) and sole traders.

What is more startling is what SARS Commissioner, Tom Moyane wrote in his opening message to SARS’s Annual Performance Plan “During the 2017/2018 fiscal year, we will focus SARS efforts on revenue collection to meet the revenue targets set by Government. We have set clear and measurable targets for increasing compliance.”

How SARS intends to achieve their revenue targets and to mitigate their risk is a big shocker for small, medium and micro enterprises and individual taxpayers.

As tax accountants, we are seeing more taxpayers being subjected to SARS tax audits and disputes this year than ever before. The dreaded term – “TAX audit”, each and every taxpayer’s nightmare because SARS audits and disputes are not only time-consuming but can be enormously costly to deal with.

The Executive Committee of SARS has identified various strategic risks they face, particularly revenue collection pressure as a result of the prevailing local economic uncertainties.   How SARS will manage this risk is as follows:

  • Increase compliance activities through increased and targeted audit and enforcement activities, as well as enhanced debt management.
  • Continue to invest in improving SARS’s risk and compliance management capabilities.
  • Increase the use of administrative penalties
  • Use 3rd party data to cross reference and validate information supplied to SARS

The Executive Committee of SARS has focused on strategies to increase tax compliance and address identified risks during 2017/2018 and will conduct targeted compliance interventions to improve compliance by performing the following amount of audits in the targeted areas:

  • 300 large companies
  • 30 base erosion and profit shifting companies (BEPS)
  • 130 high net wealth individuals
  • 6 000 small, medium and micro enterprises (SMMEs)

In addition, to continue to improve overall tax compliance during 2017/2018 following the Annual Performance Plan, SARS’s will:

  • Increase audit coverage of registered taxpayers to 12% of taxpayers on the register to ensure that the tax burden is carried fairly and equally by all taxpayers;
  • Achieve a 2.5% increase in return submission and payment compliance for all taxpayers on the active registers of Company Income Tax (CIT), VAT and PAYE.

Did you know that SARS has the power to audit you at any time, without providing you with any notice!

SARS conducts audits to check for non-compliant behaviour and/or they can randomly select you for an audit. Such randomness still requires that they have applied their mind to the objective of the audit.

To strengthen SARS’s enforcement capabilities for 2017/2018, they will:

  • Conduct and recommend 350 criminal investigations into serious and complex tax crimes for prosecution; and
  • Implement a SARS/National Prosecuting Authority (NPA) by June 2017.

There are 6 audit objectives to an audit that SARS must meet:

  • To increase tax compliance. Hence they adopt a risk-based approach when they choose who to audit.
  • To encourage voluntary compliance.
  • Proactive about desk audits
  • Conduct field audits in line with the identified risk
  • To stop tax evasion and avoidance schemes
  • To be consistent in their audit processes

There are 4 types of SARS audits, namely:

Desk audit (verification audit)

This audit is performed at SARS. During the audit, the auditor will verify the income tax return to the supporting documentation that has been submitted. During this audit you might be interviewed.

Refund audit

A refund audit is a desk audit. During this audit the auditor will check if the refund is legitimate.

Field audit

This is an audit of your accounting and other records, which is carried out at your premises. A field audit is specific to a tax type viz. VAT, employee’s tax. SARS will issue an authorisation letter which states the place, date, time of the audit as well as the initial basis and scope of the audit. If the scope and basis of the audit is not clear, you may write to SARS and request clarification. It is very important to ask SARS if the audit or investigation is criminal in nature and under which provision of the Tax Administration Act you are required to allow the field audit. By doing this, SARS may not use the information provided to them during the audit in criminal proceedings against you.

During the audit you must provide reasonable assistance to a SARS auditor. You may not obstruct a SARS official from carrying out the audit or refuse access or assistance as this behaviour can be subject to a criminal offence being instituted against you.  Never provide information voluntarily or that has not been requested by SARS. Do you know that if a SARS auditor requests your office to make photocopies that you may request a refund of the costs incurred according to the Promotion of Access to Information Act No. 2 of 2000?

Integrated audit

An integrated audit is when SARS audits all taxes at the same time. SARS has implemented steps and continues to prepare audit teams to perform integrated audits. Each audit team has already been organised to ensure that each team consists of a specialist in each of the different taxes. During this audit SARS will request certain documentation viz Annual Financial Statements, books of account, source documents, etc. and anything else that they deem necessary.

Reqeust Professional assistance during a SARS audit

You should request professional assisstance from your BAN accountant as soon as you become aware that SARS is about to audit your business to avoid the inevitable possibility of prejudicing yourself.  Should the tax audit matter become technically complex, investing in the serivces of a tax law  expert would be critical to your case and might even go as far as requiring the services of a tax advocate to represent you in court.

Even though your returns and payments are up to date across all tax categories, unfortunately SARS may still select you for an audit. The costs of an audit by SARS could literally run into hundreds of thousands of rand’s for professional fees, irrespective of the size of your business.  To mitigate against the risk of a potential SARS audit your BAN accountant can advise you on inexpensive tax risk insurance cover which is one of the most effective ways for personal and business taxpayers to protect themselves against an unexpected visit from SARS, or click onto and click on Tax Risk Insurance “apply now” on the left hand side to obtain an online quotation.

Alison Haupt, Accountant and Business Accounting Network franchise owner

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