SARS charges penalties for late returns, late payments and estimates that are too low. Each penalty can look small on its own. Several penalties together, with interest added on top, can make a tax bill much larger. You can avoid them with a few consistent habits. This post covers the main penalty types, how they add up and how to avoid them.

The main SARS penalty types

SARS has several distinct penalties, and each one applies to a different failure. These are the ones that apply to a small business:

  • Administrative non-compliance penalties are fixed monthly amounts for failures such as not submitting a return. They recur every month the failure continues and rise in bands, so one missed return builds into a large amount.
  • Late-payment penalties are commonly around 10% of the amount due when you pay a tax late, including PAYE via EMP201, VAT via VAT201 and provisional tax.
  • Under-estimation penalties are up to 20% on provisional tax where your February second-payment estimate was materially too low and missed the safe harbours.
  • Understatement penalties apply where SARS finds your return understated your tax. They range from 0% up to 200%, depending on the behaviour behind the understatement, from 'reasonable care not taken' up to intentional evasion.
  • Interest is charged on late or outstanding amounts and runs until you pay.

SARS penalties add up. A single late VAT return and payment can attract an administrative penalty, a late-payment penalty and interest, because each one applies to a different failure. The administrative penalty continues to recur each month until the return is filed.

Understatement penalties and behaviour

The understatement penalty carries the largest amounts, and your conduct sets the rate. SARS looks at why the tax was understated. It charges a lower percentage where you took reasonable care and still made a mistake. The rate rises through 'no reasonable care', 'no reasonable grounds' and gross negligence, up to 200% for intentional tax evasion. SARS treats a documented mistake made in good faith very differently from figures that were guessed. Good records speed up a verification and keep you at the low end of this scale.

Worked example of penalties on one missed return

One missed VAT return

You miss a VAT201 for a period where R60,000 was due. If you pay late, the late-payment penalty is around 10%, or R6,000. Interest runs on the R60,000 from the due date. If the return stays unsubmitted, an administrative penalty is added each month. A single missed return now carries three separate charges, and two of them keep growing each month until you file and pay. Filing the return on time would have cost nothing extra.

10%
Typical late-payment penalty, before interest and any other penalties

The cost grows with the time a failure is left unresolved. A R6,000 late-payment penalty is a one-off charge. If the same return is left for six months, interest keeps accruing and the administrative penalty recurs every month. Dealing with a missed return straight away keeps the total down.

Five habits that avoid SARS penalties

These habits depend on routine. Each one prevents a specific penalty.

  1. Keep your books up to date. You can't file on time if you don't know your numbers. Update your books monthly.
  2. Put every deadline in your diary. EMP201 by the 7th, VAT201 by the 25th every two months, provisional tax end-August and end-February. Treat them as fixed dates like payroll.
  3. Pay on time, even if the return isn't finished. Late-payment penalties and interest are charged on the money. If you can pay by the deadline, pay, and finish the return afterwards.
  4. Make a realistic provisional tax estimate. The 20% under-estimation penalty costs more than the cash you'd hold back by estimating low. Base the estimate on current figures and aim for a safe harbour.
  5. Reply to SARS by the deadline. Verification letters and queries have deadlines. If you don't reply, SARS can raise an estimated assessment and add penalties.

How SARS uses third-party data

SARS now receives third-party data directly. Banks report your interest and increasingly your transaction data. Employers submit EMP501 reconciliations and IRP5s. Medical schemes and other bodies also report to SARS. SARS issues auto-assessments from that data and cross-checks it against what you file. A mismatch can trigger a verification or an assessment within weeks. Examples include income that doesn't match your bank records, PAYE that doesn't reconcile to your EMP201s, and a VAT claim with no matching supplier declaration. Keep your filings accurate and reconciled, because SARS checks them against this data.

Requesting remission of a penalty

If SARS has already charged a penalty, you may be able to request remission. Grounds can include a first-time failure, or a reasonable cause such as serious illness, a natural disaster or a SARS system error. You lodge a Request for Remission, set out the facts and attach evidence, and SARS decides. Remission is not automatic or guaranteed. Bring the details to us and we'll assess your case.

Summary

SARS penalties follow from late or disorganised admin, so up-to-date books and diarised deadlines prevent them. If you want someone else to keep your books and meet your SARS deadlines, book a discovery call. Filing and paying on time for our clients is part of our monthly service.