[South Africa] Companies should think carefully before deferring PAYE obligations

On July 25 President Cyril Ramaphosa announced that South Africa’s government will provide continued support to businesses by deferring employees’ taxes (PAYE) for three months, Moneyweb reports. 

On the surface it appears the relief measure will help businesses to stay afloat, however, employers should think carefully before choosing to implement it.

How it works

At the time of the announcement, the government had yet to publish new regulations confirming how the relief measure will work. Finance Minister, Tito Mboweni’s July 28 address to the media had further details and it appears likely that it will more or less operate on the same basis as it did in the previous year.

If this is the case, qualifying employers will be allowed to only settle 65 per cent of their PAYE liability for a limited period. The deferred PAYE must then be settled (on top of their normal PAYE liability) over six months following the grace period.

Bad decisions made with good intentions

The intention is obviously to ease cash flow constraints in the short term however Moneyweb says it is concerning to see the government encouraging businesses to use PAYE to fund their operating expenses. In essence, they argue, it invites employers to do something that is anathema to the Commissioner for SARS, who has often reportedly expressed his displeasure with employers who simply do not pay over PAYE withheld from their employees.

There is now a question as to whether the government accounted for the potential loss to the fiscus where the relief fails to achieve its objective.

Ultimately, the fate of a company and SARS’ ability to collect the deferred PAYE are linked. In theory, if the relief manages to save a company, it will be in a position to operate profitably going forward, meaning it will be able to settle its taxes in full; everyone seemingly wins. But it is not that simple.

The success of the relief measure depends on an employer’s ability to recover during the grace period. Three months is a comparatively short period and although a company’s cash flow may improve initially after the holiday the employer will have an even higher PAYE liability.

An employer should consider whether its business will recover to such a degree that will be able to carry the additional PAYE liability three months down the line. If it cannot pay back the deferred PAYE on time, SARS will impose late payment penalties and interest. The compounded burden may prove a tipping point for the business and ultimately translate into a loss for the fiscus too.

Potential alternative

Many small business owners would confirm that their companies went under because of the way the South African VAT system operates. In most cases, VAT vendors have to account for supplies upon issuance of an invoice, as opposed to the date of receipt of payment.

This means that they must continue paying VAT over to SARS, even if their invoices have not been paid. In the wake of the pandemic, this practice is particularly problematic. A would perhaps be better to allow small business owners to operate on a payment basis until things change. But at present, the government is not considering this as a viable alternative.

Some companies may benefit from this concession if they need a short reprieve to find their way onto more solid ground. This may be the case for those whose prospects have materially improved with the easing of the latest lockdown restrictions. Nevertheless, they should carefully project their financial position over the coming months before pursuing this course of action.

On July 25 President Cyril Ramaphosa announced that South Africa’s government will provide continued support to businesses by deferring employees’ taxes (PAYE) for three months, Moneyweb reports. 

On the surface it appears the relief measure will help businesses to stay afloat, however, employers should think carefully before choosing to implement it.

How it works

At the time of the announcement, the government had yet to publish new regulations confirming how the relief measure will work. Finance Minister, Tito Mboweni’s July 28 address to the media had further details and it appears likely that it will more or less operate on the same basis as it did in the previous year.

If this is the case, qualifying employers will be allowed to only settle 65 per cent of their PAYE liability for a limited period. The deferred PAYE must then be settled (on top of their normal PAYE liability) over six months following the grace period.

Bad decisions made with good intentions

The intention is obviously to ease cash flow constraints in the short term however Moneyweb says it is concerning to see the government encouraging businesses to use PAYE to fund their operating expenses. In essence, they argue, it invites employers to do something that is anathema to the Commissioner for SARS, who has often reportedly expressed his displeasure with employers who simply do not pay over PAYE withheld from their employees.

There is now a question as to whether the government accounted for the potential loss to the fiscus where the relief fails to achieve its objective.

Ultimately, the fate of a company and SARS’ ability to collect the deferred PAYE are linked. In theory, if the relief manages to save a company, it will be in a position to operate profitably going forward, meaning it will be able to settle its taxes in full; everyone seemingly wins. But it is not that simple.

The success of the relief measure depends on an employer’s ability to recover during the grace period. Three months is a comparatively short period and although a company’s cash flow may improve initially after the holiday the employer will have an even higher PAYE liability.

An employer should consider whether its business will recover to such a degree that will be able to carry the additional PAYE liability three months down the line. If it cannot pay back the deferred PAYE on time, SARS will impose late payment penalties and interest. The compounded burden may prove a tipping point for the business and ultimately translate into a loss for the fiscus too.

Potential alternative

Many small business owners would confirm that their companies went under because of the way the South African VAT system operates. In most cases, VAT vendors have to account for supplies upon issuance of an invoice, as opposed to the date of receipt of payment.

This means that they must continue paying VAT over to SARS, even if their invoices have not been paid. In the wake of the pandemic, this practice is particularly problematic. A would perhaps be better to allow small business owners to operate on a payment basis until things change. But at present, the government is not considering this as a viable alternative.

Some companies may benefit from this concession if they need a short reprieve to find their way onto more solid ground. This may be the case for those whose prospects have materially improved with the easing of the latest lockdown restrictions. Nevertheless, they should carefully project their financial position over the coming months before pursuing this course of action.