Many small business owners are paying about 18 percentage points more income tax than they need to, according to Renier Nell, the director of accounting and tax firm Innovative Accounting Solutions (IAS). This stems from ignorance of tax law.
“Tax is our bread-and-butter and we relish taking on SARS on behalf of our clients. For instance, the average owner is often not aware that his business may qualify for the small business corporation tax rate that is far less than the corporate tax rate of 28%,” says Nell.
He says that to qualify for this lower rate of tax, the company director has to be the sole director of only that business and no other. Secondly, the firm’s annual turnover must be less than R20 million, and business cannot have investments anywhere of more than 20% derived from gross income or capital gains. “While this may seem simple enough, our experience in dealing with smaller businesses is that most of them are unaware of this small business tax rate. Many entrepreneurs believe if they are a company, they must pay the 28% corporate tax rate,” explains Nell.
Innovative Accounting Solutions has saved a number of distressed clients from having to put themselves into Business Rescue, a turnaround tool for businesses which is often simply a prelude to liquidation. “We have saved our clients over the past year an aggregate of over R10.5 million on their tax bills by means of interrogating every single item of income and expenditure. In one instance, we enabled a business to survive when we reduced their overdue tax bill from R3,5-million to just R60 000. We also do individual’s personal tax.”
The irony for clients, he says, is that the tax savings alone typically more than fully cover their cost to client, before any other efficiency benefits.
“Medium to large corporates can afford to have tax and accounting specialists to attend to such matters, but we find that in smaller businesses, the owner usually single-handedly attends to all matters on a do-it-yourself basis. With such entrepreneurs typically soloing operations, marketing, accounting and even being the office manager – with all the attendant calls selling printers, photocopiers and insurance – he or she tends to have a busy schedule. From our experience with small business owners, (though we also assist medium-sized businesses) tax is something they would rather avoid. It tends to get neglected, even though it is often one of the biggest overheads in a business,” Nell adds.
While saving on the tax bill is often the biggest savings, Nell says that it is only the beginning. What Innovative Accounting Solutions specialises in is providing a full-service outsourced finance and administration function, which enables it to get up close and personal with all the business’ bills and suppliers. It brings a level of professionalism which is usually reserved for larger companies.
“Administration is a matter of discipline rather than rocket science. We know for instance that most business owners are busy doing what they know best – running operations. That is seldom where a business fails. They fail in the backroom where their finance and administration systems are not at the same level of professionalism as their marketing and operations.
“Most businesses fail because of poor cash flow – and we have all heard the statistics that 8 out of 10 start-up businesses fail. With standardised and simplified accounting business management systems, entrepreneurs are provided with the resources and systems to identify company wastage and cut costs, freeing up cash flow,” says Nell.
On behalf of clients, Innovative Accounting Solutions takes the same discipline it applies to tax to the business’ suppliers – line by line. Each supplier is required to re-tender for the business each year, and alternative bids are obtained.
“Anyone who has chopped their insurance bill in this manner knows that the price of anything can be drastically reduced if the supplier knows the business is not guaranteed.
“If suppliers feel assured of your business every year, they will automatically increase their rates 10% a year. We also look at companies’ profit margin. If it is too tight, we advise companies to look at new suppliers.
“The same also applies to consumables: many creditors’ clerks will simply pay an invoice without question. We see this type of behaviour reported by the auditor-general regarding government procurement where it sometimes pays up to 13 times the retail price of a stapler. That happens where nobody cares. We care. This is the biggest advantage of outsourcing – we offer clients the best practice cost management techniques, at the fraction of the cost. In most cases, we can save an average company up to R30 000 a month in this manner,” Nell says.