STEFAN KRITZINGER: SARS getting aggressive with non-compliance – businesses need to shape up or ship out

During his State of the Nation Address (SONA) earlier in February, President Cyril Ramaphosa announced that the government would be moving ahead with a digital identity system that "will transform the relationship between citizens and government, and create one government accessible to every person to touch".

In summary, the system will ensure that every interaction a citizen will have with the government and its services, will all be linked to a single unique identifier. Currently, South Africans must manage multiple unique identifiers, such as their ID number for hospital and Home Affairs, and a separate tax number to file their returns.

This current arrangement has naturally led to a barrage of corruption or non-compliance. Because government systems remain fragmented across the board, it is still possible for some people to receive a SASSA grant, but also be in full-time employment, earning far above the threshold to receive state welfare. The introduction of a digital identity system has also received endorsement from South African Revenue Services (SARS) Commissioner, Edward Kieswetter, expressing that it would remove many risks for exploitation of government systems and services.

Feeling the pressure to find more creative and innovative ways to collect much-needed revenue, SARS has recently been spearheading many initiatives to combat poor and non-tax compliance. By the end of the 2023/24 tax year, SARS had successfully clawed back R210 billion of revenue owed to the state that had been withheld by taxpayers and businesses. Kieswetter credited this success to the revenue collectors' use of artificial intelligence (AI) and proactive measures, built on the foundation of its modernisation programme.

At the time, Kieswetter commented that the use of AI machine learning algorithms was instrumental in debt propensity modelling, where the technology went through books to pick out instances where there was a higher propensity to recover debt, and with minimum resources. Kieswetter qualified this with an example of two businesses each owing SARS R5,000, with one at profitable levels, while the other in business rescue. The AI technology enables SARS to make a call that it would be a waste of resources and time to pursue the unpaid taxes from the latter business, and more practical to target the former.

There are several other mechanisms, with the leveraging of technology, that SARS is administering to combat and tighten weak tax compliance. In fact, SARS’ overall modernisation programme is a warning to tax evaders that the opportunities to go undetected are closing. The government is feeling the pinch of a strenuous cash shortfall, and with the raising of taxes a dead-end option, aggressive revenue collection remains the only solution on the table.

Small, micro and medium enterprises (SMMEs) are also vulnerable should they fail to file their tax returns by the end of the tax year this February.

In fact, one of the most basic mistakes that small business owners make is not knowing the difference between a CIPC annual return and a SARS tax return, even though they are two separate processes, managed and processed by two different government departments. A CIPC return is the report a business needs to submit to the Company and Intellectual Property Commission (CIPC) to update the company’s details and inform the CIPC that the company is still operating. This is due on or before the anniversary date of the company’s registration. Missing this deadline comes with severe consequences such as fines or deregistration. On the other hand, a SARS tax return is the financial report a company submits to SARS to show how much money the business made and to calculate how much tax is due. Businesses must keep their financial records updated for both filings.

While there is a filing fee for the CIPC, the amount is determined by the company’s turnover. Nonetheless, the CIPC is tightening compliance with the Companies Act by deregistering businesses that either fail to submit their annual returns, non-submission of beneficial ownership declarations, or are inactive over time. Deregistration also comes with its consequences. Directors are no longer protected by limited liability and can be liable for any company debts, bank accounts can be frozen, service providers can refuse to deliver services, and creditors can refuse to pay for their accounts. Avoiding deregistration can be achieved by simply filing annual returns on time, submitting beneficial ownership declarations, and maintaining records such as financial statements, tax filings and shareholder agreements.

However, even while still registered, some businesses become inactive. Many owners believe this is a licence to skip on their tax returns, not realising that regardless of whether the company is making money, a tax return must still be filed. Failing to do so, will result in penalties. Business owners can avoid this by filing a null return, or loss with SARS, which could be leveraged against future tax returns when the company makes a profit again. However, if one’s business is inactive, and there are no plans to resume operations anytime soon, it would be wise to deregister it with CIPC. This would require a tax clearance certificate from SARS (tax compliance being a prerequisite) but saves an owner in the long run from having to make tax filings every year, especially if the business is dormant.

Businesses, whether small or large, need to know the law and adhere to it. While one might stand a chance to get away with it in this tax year, the law is bound to catch up to evaders, bringing with it far worse, and potentially financially devastating consequences.