Due the slowdown in economic activity, tax authorities around the globe are under pressure to collect revenue. In September 2009 the IRS in the United States reacted to this by instituting payroll audits on more than 6,000 companies to address the high levels of non-compliance and to boost revenue collection. SARS is under similar pressure and given the fact that peak collection mode will be in full swing between now and 31 March 2010 taxpayers should not expect mercy where areas of non-compliance are identified, especially when it relates to Pay-As-You-Earn (PAYE) compliance.
It is therefore critical that employers to take immediate steps to ensure that all aspects relating to PAYE have been complied with, especially in high risk areas.
In most cases PAYE non-compliance is uncovered through SARS audits, usually resulting in substantial penalty and interest charges in addition to the loss of productive time and resources for an employer. PAYE audits are frequent and result in substantial revenue for SARS due to the high levels of non-compliance.
SARS may institute PAYE audit proceedings on an employer randomly, as part of an industry drive, specific areas of non-compliance (e.g. expatriate employees or independent contractors) or acting on information received by third parties, such as disgruntled employees. Areas of non-compliance are also detected through the responses to extensive PAYE questionnaires sent randomly to unlucky employers.
PAYE audits are by their very nature time and resource intensive, which is why many employers opt to voluntary disclose non-compliance issues before an audit intervention from SARS. Upfront disclosure to SARS usually results in a favourable outcome for the employer regarding penalty charges, but is not without risk. Depending on the facts and circumstances SARS may decide to assess the employer to the full extent of the Act, especially in an environment where tax collection is under pressure.
Consequences of non-compliance
Failure by an employer to comply with the PAYE provisions can result in onerous penalties. A standard 10% penalty will be imposed on an employer who failed to remit the correct amount of PAYE within the prescribed period. In addition, interest at the prevailing rate will also be levied, but be warned that moves are afoot to levy this on a compound basis.
More stringent penalties of up to 200% can be enforced where SARS is satisfied that there was intent to evade PAYE. In a worst case scenario an employer could therefore be faced with penalties of up to 210% and compound interest charges. In certain instances, shareholders and directors involved in the overall financial affairs of a company may also be held personally for PAYE debts.
Regular PAYE reviews should form part of any solid tax risk management strategy. Employers should therefore embark on an extensive review of their PAYE practices in light of the anticipated uptick in audit and collection activity before 31 March 2010.
Special focus must be placed on areas such as independent contractors, fringe benefits and the highly complex provisions affecting expatriate employees working in South Africa. At Cliffe Dekker Hofmeyr Inc. we have experienced professionals who are equipped to deal with all aspects of PAYE compliance including general advice and remuneration structuring, reviews, ruling applications, assistance in SARS disputes and expatriate tax services.
Ruaan van Eeden
Senior Associate, Tax