VAT TALK
Reconciliation of Accounting Records to the VAT returns before Submission
VAT vendors who manage their own books of account and prepare their own VAT returns often overlook the importance of reconciling their accounting records (general ledger) with the VAT returns submitted. Common discrepancies include mismatched turnover between the VAT returns and the general ledger, misalignment of input VAT claims with cost of sales and eligible expenses, and differences between the total VAT due or refundable on the VAT 201 return and the VAT control account in the general ledger.
These discrepancies pose significant challenges when financial statements, based on the general ledger, are submitted alongside the income tax return. SARS’s automated system flags inconsistencies between the income tax return and VAT returns, triggering a quest for an explanation. If the vendor fails to provide satisfactory reasons for the discrepancies, SARS may initiate a full audit, which could result in serious financial consequences for the business.
Solution: To avoid the risk of an expensive and time-consuming SARS audit, it’s advisable to invest in an experienced freelance BAN accountant to prepare these critical reconciliations before the VAT return is submitted to SARS. This is particularly important as bookkeepers often lack the expertise required for this complex task.
Article by: Monique Sharland (Director)
SHAREHOLDERS: Their responsibilities and limitation of liabilities
Shareholders are the individuals or entities that invest capital into a company, obtaining ownership interest in return. They play a crucial role in company governance and have several key responsibilities and rights. Shareholders are entitled to vote on significant company matters, such as the election of directors and major changes in company structure. This voting power allows shareholders to influence the strategic direction of the company. Additionally, shareholders are entitled to receive a portion of the company’s profits, typically distributed as dividends. Their ownership stakes in the company can fluctuate in value based on the company’s performance.
Importantly, shareholders benefit from limited liability, meaning their financial risk is confined to the amount they have invested in the shares. They are not personally liable for the company’s debts or financial obligations. This limitation of liability encourages investment by reducing the potential financial exposure for shareholders.
Article by: Lori Gay (franchisee owner, Johannesburg)
DIRECTORS: Their responsibilities and limitation of liabilities
Directors are appointed or elected members of the company’s board, responsible for overseeing the management and long-term success of the company. They are entrusted with setting strategic goals and ensuring that the company’s operations align with these objectives. Directors have a fiduciary duty to act in the best interests of the company and its shareholders, encompassing duties of care, loyalty, and good faith. They must ensure compliance with statutory obligations under South African law, including the Companies Act, financial reporting, tax filings, regulatory disclosures, and risk management.
In their decision-making role, directors are accountable for significant issues such as business expansion, budget approvals, and executive appointments. They are expected to maintain transparency and integrity in their conduct.
While directors are not personally liable for the company’s debts, they can face legal and financial consequences for breaching their fiduciary duties. These consequences may include civil and criminal liability, disqualification from serving as a director, and financial penalties. Directors may be held personally liable if they permit reckless trading, breach their fiduciary duties, act without proper authority, or engage in fraudulent activities.
Implications for the Owner/Director of a Small or Medium Enterprise (Business)
Even when the owner (shareholder) of a Small or Medium Enterprise (SME) is also the director, the company remains a separate legal entity. As a shareholder (owner), their liability is typically limited to their investment in the company. However, if they are also the director, they can be held personally liable for the company’s debts if they breach their fiduciary duties.
It’s crucial for owner-directors to ensure full compliance with all company regulations, regardless of holding both titles. While holding both roles provides significant control, it does not grant the freedom to act outside the provisions of the Companies Act. Directors are legally required to act in the best interest of the company and its stakeholders, and failure to do so could result in personal liability.
Article by: Lori Gay (franchisee owner Johannesburg)
DID YOU KNOW?
Unlike ordinary creditors, SARS (South African Revenue Service) has the legal authority to recover your business’s tax debt from third parties, provided they follow the correct legal process. This means SARS can instruct your bank to transfer available funds from your business’s accounts directly to settle SARS’s debt. Additionally, SARS can direct your customers—both those who owe you money and those who will owe you in the future—to pay their debts directly to SARS to satisfy your tax liability.
Solution: After reviewing your company’s financial situation, your accountant can provide expert advice on the best steps to take to prevent this from happening.
TOP TIP
Understand Legal Requirements
Staying informed about the legal requirements for running your business is crucial, as failure to comply with certain laws can result in criminal prosecution. It’s important to consult with your accountant and ask questions to ensure a clear understanding of the laws that directly impact your operations.
Key areas to focus on include company law obligations such as maintaining a company register, issuing share certificates, recording resolutions, registering beneficial ownership, managing director changes, and preparing annual financial statements. Additionally, staying on top of tax compliance is essential. Adhering to these legal requirements helps avoid complications, such as fines, penalties, or even criminal charges and prosecution.