No escape from SARS penalties for dormant companies

The Tax Administration Act 28 of 2011 stipulates that SARS can issue administrative penalties for outstanding tax returns. Furthermore, SARS is authorized to charge penalties on companies that do not comply with tax laws, including companies that are dormant. Last year, SARS issued a notice stating that from 1 December 2022 admin penalties will be charged for late submission of income tax returns which are outstanding from 2007 to 2020. The recent implementation by SARS of late-submission penalties applies to all registered companies, whether actively trading or dormant.

By definition, a dormant company is a company that is registered with the relevant government authorities, in this case SARS, but is not actively trading or carrying out any business activities. In other words, it is company a company that exists in name only, without any significant operations, income, or expenses. Dormant companies are often used as a way to hold assets or intellectual property, to reserve a company name, or to prepare for future business operations. They are also used in situations where a company is temporarily not trading, such as during a period of restructuring or when awaiting the start of a project. Though not functional, dormant companies do not escape the responsibility to adhere to tax laws. In most jurisdictions, dormant companies are subject to less strict legal and regulatory requirements than active companies. However, they are still required to file certain legal and financial documents with the relevant authorities, such as annual returns, tax returns, and financial statements, even if they have no income or expenses to report.

No escape from SARS penalties for dormant companies

There are non-compliance penalties that are paid to SARS and these penalties will continue to re-occur until the submission of the unpaid tax returns. The penalties accrue monthly and are based on the estimated taxable income available to SARS, ranging from R250 to R16 000 per month and remain due to SARS for payment even after the submission of the tax returns. However, the payment of SARS penalties may vary depending on the specific circumstances including, the severity of the violation, the taxpayer's history of compliance, and any mitigating factors. For example, if a taxpayer has a history of timely compliance with tax obligations and can demonstrate that they made a good-faith effort to comply, SARS may be willing to reduce the penalty amount or offer a payment plan.

The solutions granted or available to dormant companies in the request for the remission of penalties, just to name a few are firstly, to dispute penalties if they believe they have been wrongly assessed, but this will depend on the specific circumstances of each case. Secondly, taxpayers have the option to deregister their company to evade extra tax penalties. Here is a step-by-step guide on how to close a dormant company:

Check the company’s status: Before you begin the process of closing a dormant company you should first verify that it is indeed dormant. This means that the company has not carried out any business activities such as selling goods or services, or generating revenue in the past financial year.
Notify the Companies and Intellectual Property Commission (CIPC): Once you have confirmed that the company is dormant you must notify the CIPC of your intention to close the company. This can be done via email or by submitting a form in person at the CIPC’s offices and the turnaround time is approximately 6 months. Supporting documents required are as follows:

Resolution/letter on company letterhead signed by all directors approving the intention to deregister the company-stating it is dormant and has no assets and liabilities.
Tax Clearance certificate.
Certified copy of each director’s ID not older than three months

Pay any outstanding fees and taxes: Before the CIPC can process your request to close the company you must ensure that all outstanding fees and taxes have been paid. This includes any annual return fees or taxes owed to the South African Revenue Service (SARS)
File the necessary documents: In order to close a dormant company, you will need to file certain documents with the CIPC. These include a ‘Notice of Intention to De-register a Company’ form and a ‘Notice of Resolution to De-register a Company’ form.

There is no escape from sars penalties for dormant companies according to the tax Administration Act 28 of 2011 which stipulates that SARS can issue administrative penalties for outstanding tax returns.

The-solutions-granted-or-available-to-dormant-companies-in-the-request-for-the-remission-of-penalties

The process might seem like a simple one however, there are grounds for de-registration: A company or close corporation may be referred for de-registration:

upon application by any party subject to the requirements for a request for de-registration,
if annual returns are outstanding for more than 2 successive years, or
if the Commission believes that the company or close corporation has been inactive for 7 years.

Once the CIPC has approved your request to close the company you must publish a notice in the Government Gazette announcing the company’s de-registration as well as notify creditors and shareholders, should the company have any. This can be done through a notice in the Government Gazette or by sending a letter to each creditor or shareholder individually.

In South Africa, a company is considered dormant if it has not conducted any business activity or generated any income for a certain period of time. Even if a company is dormant, it still has to comply with certain legal and tax requirements, such as submitting annual tax returns and financial statements to the relevant authorities. However, there is a misconception that an entity is automatically precluded from taking steps to formalize its dormancy once it ceases to trade for whatever reason. The Companies Act 71 of 2008 stipulates how a company can formalize its dormancy. An entity can formalize its dormancy by way of a liquidation process, when there are still assets and creditors, or deregistration with the Companies and Intellectual Property Commission, when there are no assets or outstanding creditors. These assets are used to unlock finances to pay creditors, including the SARS. Once the dormancy has been formalized, Sars must be notified. The company must deregister for all the tax types for which it was registered, such as income tax, value-added tax, Pay-As-You-Earn, and customs and excise.

No escape on sars penalties for dormant companies

It is important for companies, even those that are dormant, to comply with tax laws to avoid penalties and potential legal action. If a company is unable to comply with its tax obligations due to financial difficulties or other reasons, it may be possible to negotiate with SARS for leniency or to make arrangements to pay off the outstanding taxes over time. If this is not executed, the penalty for late submission of annual tax returns is calculated as a percentage of the tax due, and the amount of the penalty increases for every month that the return is late . In addition, there may be penalties for non-compliance with other tax obligations, such as failing to register for certain taxes or not submitting monthly returns. If SARS is charging penalties on companies that are dormant, it may be because the companies are not meeting their tax obligations. For example, if a dormant company fails to submit its annual returns, SARS may impose penalties for non-compliance.

The leniency that SARS imposes is that, if you have had a dormant company, that hasn’t traded for a few years and is behind on submitting tax returns, SARS will implement a penalty based on the most recent tax return received. For example, a quick calculation shows that a company that has been dormant for 35 months (as per the penalty) and has not submitted income tax and VAT returns will have incurred minimum administration penalties of R18000 for income tax and R120 000 for VAT respectively.

The penalties that may be imposed by SARS on dormant companies that fail to comply with their tax obligations are as follows:

Late submission of tax returns: A dormant company may be penalized for failing to submit their tax returns on time. The penalty for the late submission of tax returns is a percentage of the tax due, and it increases the longer the delay.
Late payment of taxes: If a dormant company fails to pay their taxes on time, SARS may impose a penalty that is a percentage of the tax amount owed. The penalty for late payment of taxes also increases the longer the delay.
Failure to register for tax: If a dormant company is required to register for tax but fails to do so, they may be penalized by SARS. The penalty for failing to register for tax can be a fixed amount or a percentage of the tax due.
Failure to maintain proper records: SARS requires that all companies maintain proper records of their financial transactions. If a dormant company fails to maintain proper records, they may be penalized by SARS.

It's important to note that the specific penalties imposed on dormant companies by SARS can vary depending on the circumstances of the non-compliance. It's always best for a dormant company to seek professional advice to ensure that they comply with all tax obligations and avoid any penalties. If you ignore notifications from SARS, it will keep levying the administrative penalties and the company will have a non-compliance tax status. This not only affects the dormant company but also its directors and shareholder in their personal capacities.