Michael Whitehead | Business Unit Manager | Affinity-HNW | Aon South Africa | mail me |
Running a business means managing risk every day. Whether it’s protecting assets, managing cash flow or ensuring regulatory compliance, business leaders understand the importance of planning for the unexpected. However, one risk often receives far less attention. It is the possibility of a tax audit.
The South African Revenue Service (SARS) conducted approximately 230,000 tax and customs compliance audits in the last fully reported financial year. It also conducted an additional 1.7 million verification cases. Therefore, it’s not a case of if, but when, your business will be audited.
A SARS audit doesn’t mean you’ve done anything wrong
Many business owners assume that audits only happen when something has gone wrong. SARS conducts millions of audits as part of its ongoing compliance programme, and businesses can be selected even when their tax affairs are in order. Audits may be random or triggered by data discrepancies, changing legislation or routine verification processes.
A SARS audit should not automatically be viewed as an indication of non-compliance. However, once an audit begins, businesses are expected to respond quickly. They must provide detailed financial records, supporting documentation and technical explanations. Depending on the complexity of the review, this process can take months to resolve. It often requires specialist tax expertise.
Many businesses believe that having a good accountant is enough. While your accountant plays a vital role in your business, complex SARS audits and disputes may require additional tax specialists or legal expertise. Those professional costs can escalate quickly, regardless of the final outcome.
The hidden cost of defending your business
For many SMEs and commercial businesses, the greatest financial impact of a tax audit isn’t necessarily additional tax. Instead, it is the cost of defending the business throughout the audit process.
Professional fees may include:
- Specialist tax practitioners.
- Tax attorneys.
- Auditors.
- Technical tax advisors.
- Additional accounting services.
- Representation during objections, appeals or dispute resolution.
These costs can place unexpected pressure on operating budgets. They are also hugely time-consuming. As a result, they divert management’s attention away from running the business.
Tax risk insurance protects businesses against the professional costs associated with managing SARS audits and related disputes. It essentially frees up your time and resources as a business owner to run your business, while having the peace of mind that your tax audit is being handled by experts in the field.
Tax risk insurance and its impact on a SARS audit
Rather than trying to source specialist expertise following an audit notification, policyholders have a team appointed to assist from the beginning of the process. This ensures submissions are technically sound and procedurally correct.
If the business already works with an accountant, they remain part of the defence team, with their fees covered for services during the claim.
Cover may include matters relating to:
- Income tax audits.
- VAT audits.
- Employees’ Tax (PAYE).
- Capital gains tax audits.
- Appeals and dispute resolution before the Tax Board or Tax Court.
The policy also offers additional advantages, including:
- Cover that applies retrospectively once the policy is active, regardless of how far back SARS reviews records.
- Multiple claims during a policy year, where applicable.
- Predictable indemnity limits that help businesses plan for potential exposure.
Businesses should also consider other contractual and commercial risks, including restraints of trade, as part of their wider risk management strategy. Although restraints of trade differ from tax audit exposure, both demonstrate why businesses need appropriate protection against unexpected professional and financial costs.
A comprehensive risk strategy should therefore consider restraints of trade alongside tax, liability and operational exposures. This broader approach can help businesses prepare for disputes and compliance challenges before they arise.
A smart addition to a business risk strategy
Businesses routinely insure their buildings, vehicles, cyber risks and liability exposures. They do so because they understand that unexpected events can disrupt operations. Tax risk deserves the same consideration.
As SARS continues to strengthen its compliance capabilities, businesses of every size should consider whether they have the financial resources and specialist expertise available if an audit occurs. The same forward-looking approach can apply to restraints of trade and other risks that may create unexpected professional costs.
The objective is to ensure that your business has experienced professionals guiding you through the process of a tax audit without unexpected professional costs disrupting your cash flow.
