Tackling the 4 tax topics causing the biggest headaches for tax practitioners right now
In this concise guide, we explore the four most pressing tax challenges for practitioners today. From targeted risk assessments to managing Consumer Protection Act demands, preemptive planning for advance income, and optimizing subcontractor engagements, we lay out effective, practical strategies for mastering the current tax landscape.
1.The why and how of Tax Risk Assessment
Navigating tax compliance is complex, with every industry facing unique challenges. This section explores specific tax risks across sectors like accounting, construction, software development, and education, guiding tax practitioners through income tax, VAT, PAYE, and more. It highlights key concerns and strategies for tailored tax solutions, enhancing compliance and fiscal efficiency. From WIP calculations for service firms to R&D credits for tech companies, this blueprint offers the insights needed for confident and compliant tax navigation.
1. Accountant/Auditor/Lawyers:
Income Tax: Moderate risk due to Work in Progress (WIP) and Income Recognition, with specific mention of Section 7B.
VAT: Moderate risk, largely due to zero-rating services to non-residents, VAT on entertainment and personal expenses, and the recovery of expenses from clients. No VAT claimable on CIBA subscriptions for employees.
PAYE: Moderate risk due to significant expenses. Challenges include the reimbursement of business expenses like travel claims and allowances.
Others: Often operate through partnerships, adding complexity, especially during partnership changes or buy-outs. Shareholding issues might be inadvertently covered by Section 8C.
2. Construction:
Income Tax: Manage risks associated with long-term contracts and progress payments, including compliance with Section 24C on prepayments.
VAT: Be cautious with VAT on subsistence and retentions, especially if operating outside South Africa.
PAYE: Address temporary workers' tax issues and manage subsistence costs.
Others: Prepare for specific sessions such as the March Tax Happy Hour dedicated to the construction sector to stay informed on sector-specific risks.
3. Software Developers:
Income Tax: Assess the eligibility for Section 11D R&D claims and handle upfront fees and progress payments meticulously.
VAT: Understand the intricacies of zero-rating for services to non-residents.
PAYE: Ensure compliance with Section 7B concerning bonuses.
Others: Be aware of corporate structure changes and M&A activities, and manage capital gains and estate planning strategically.
4. Education:
Income Tax: Differentiate between exempt and non-exempt entities and handle income accordingly.
VAT: Navigate VAT exemptions and liabilities for various services and sales.
PAYE: Calculate fringe benefits accurately, especially regarding employee benefits.
Others: Address the tax considerations for non-profit versus for-profit structures.
Tax practitioners should conduct these assessments with a proactive approach, ensuring they are up-to-date with the latest tax laws and interpretations to mitigate risks effectively. They must also communicate these risks and strategies clearly to their clients, ensuring a collaborative approach to tax planning and compliance.
2. Balancing between the Consumer Protection Act and Tax Laws
The Consumer Protection Act imposes significant responsibilities on businesses in ensuring that their marketing is honest, terms and conditions of sales are clear, and that all products meet quality and safety standards. They are also required to provide full product information, allowing consumers to make informed decisions. Compliance with these obligations is not optional, and businesses must align their operations accordingly to avoid legal repercussions and maintain consumer trust. Businesses must strike a balance between adhering to consumer protection laws and fulfilling tax obligations. A relatable scenario could be a retailer's return policy that offers refunds or credit for returns. This policy not only needs to comply with consumer rights under consumer protection laws but also must be managed in a way that aligns with tax reporting for "received by" income.
In Case No.: IT 24510, the court agreed with the taxpayer that the income from unredeemed gift cards should only be recognised for tax purposes when the gift cards are used or expire, not when sold. This decision was based on the principle that the funds from gift card sales are held for cardholders, under consumer protection law, until redemption or expiration. Therefore, the additional tax assessment by SARS was overturned.
3. Navigating Advanced Income and Section 24C
Section 24C of the Income Tax Act provides for an allowance to taxpayers who have received income in advance, which is intended for the future delivery of goods or the rendering of services. The allowance enables businesses to defer the tax on income received in advance until the actual goods are delivered or services are rendered. This prevents the business from facing an immediate tax liability on money that is not yet earned in an economic sense. However, the challenge is that the business must accurately match these advance payments against the future expenses that will be incurred when delivering the goods or services. If these expenses are not properly matched or if the advance payment is used for other purposes, the business may face unexpected tax liabilities. Keeping proper accounts is therefore key.
Consider a company receiving large advance payments before the commencement of the contract work, to enable the contractor to purchase materials, equipment etc. If these advance payments are not matched by deductible expenditure, the full amount of the advance payments is subject to tax. The Draft Interpretation Note 78 guides the recognition of income received in advance, balancing the need for compliance and financial prudence.
4. Simplifying Tax for Service Providers and Subcontractors
Service providers and their dealings with subcontractors often involve complex financial and tax considerations, particularly with work in progress (WIP) and project-based billing. For instance, an architecture firm needs to accurately account for the time spent on projects, not only for billing purposes but also for tax compliance. The dynamics of paying fees to a subcontractor further add to the complexity, highlighting the importance of understanding principal/agency relationships to optimise tax positions.
For tax purposes, agents record only their commissions or fees as income, affecting their turnover solely by these amounts, which are reported for Income Tax and VAT. Principals, who own the goods or services sold, include the full sales in their turnover and can deduct the agent's fees as expenses. The principal's income declarations and VAT claims are thus based on gross sales, while agents are taxed only on their earnings from the principal.
Conclusion
CIBA’s "Tax Happy Hour" event shed light on the complex landscape of tax risk and compliance, emphasising the importance of staying informed about tax and consumer protection laws. Through practical examples, such as the strategic management of advanced payments and the careful administration of subcontractor relationships, businesses can navigate the tax terrain confidently. A proactive stance on tax risk management is essential, ensuring compliance while paving the way for strategic financial planning and growth, all articulated in an accessible and professional tone.
In CIBA's February Tax Happy Hour, we will explore some of the tax challenges facing the service provider including but not limited to the following:Effect that the Consumer Protection Act will have on service providersPrepayments and section 24CGift CardsFranchise feesTax treatment of “Work in Progress” for the service providerTax treatment of payments to sub-contractorsPrepayments and section 23HTax effect of agency agreements – VAT and Income Tax
The session will be highly practical and will assist members in providing valuable industry specific advice to their clients in the services industry.