Impact of non-compliance with Tax Laws and the Companies Act

Doing business in South Africa is often described as being exciting yet challenging. The average entrepreneur is kept awake by an array of concerns, the most prominent of these being able to turn a profit and remain successful. With this being said, financial success means little to nothing if your company is found to be in violation of laws and regulations that govern businesses, thereby facing the possibility of being penalised or, even worse, dissolved.

Local and international business regulations are put in place to govern business operations and to ensure that commercial business entities act in a reasonable and responsible manner. Unfortunately, a lot of businesses tend to treat compliance as a secondary function, with little consideration of the consequences of non-compliance. Small, Medium and Micro Enterprise (SMME) owners are often guilty of this, thinking that they may slip below the radar due to their size.

Here are consequences of non-compliance with Tax Law regulations and the Company Act.


Penalties and fines from the regulators

The most obvious consequence of non-compliance is financial punishment from the relevant authorities. There are two different types of administrative non-compliance penalties that can be levied by The South African Revenue Service (SARS), namely; fixed amount penalties and percentage based penalties, both of which relate to the failure to comply with administrative requirements of the Tax Act. Payment of these penalties and fines could have a catastrophic impact on your business’ bottom line. It may be worth the hassle to ensure that your company is compliant with the laws and regulations, than facing the risks of being penalised.


Business can be shut down with the owner/director held liable

The biggest risk of non-compliance with tax regulations and the companies act is the deregistration and closure of your business. In addition to this, possible action could be instituted against the directors of the company for failing to fulfill their fiduciary duties. The legal effect of the deregistration process is that the juristic personality of the company can be withdrawn and the company ceases to exist. According to the Companies Act, all companies are required to file their respective CIPC returns on an annual basis. Failure to do this within the prescribed time period may lead to the CIPC deregistering the company and removing it from its active records. This could result in a range of issues for the company, such as the forfeiture of registered assets of the company.


Piercing the corporate veil

Under South African law, a company has a separate legal (juristic) personality from its members (the shareholders) and its officers. The company’s directors and officers are mandated to act in the best interests of the company. When the veil of incorporation is pierced or lifted due to either fraudulent activities or non-compliance, the court is in a position to strip away the protective covering of the limited liability presented by the company structure.

Non-compliance with Tax laws and the Company Act for a Public Company or a Close Corporation can lead to the lifting of the corporate veil, allowing for the shareholders to be held personally liable.


Ability to get funding

Business funding institutions such as banks, incubation hubs and development programmes, do not compromise when it comes to compliance to the Tax laws and the Companies Act. Neglecting your duties to keep your business compliant may lead to your losing out on much needed investment or funding. Non-compliance with either the Tax Laws or the Companies Act may cast doubt into the legitimacy of your business, as well as your legitimacy as an entrepreneur. Compliance is also usually taken as the reference point against which ethics, values, policies and codes of conduct can be measured. Given the choice of funding either a compliant entity or a non-compliant entity, most funders will happily opt to fund the compliant business.


Ability to sell the business

Another reason to ensure that your SMME is always compliant with the regulations is the ability to sell your company when the opportunity presents itself. Any company conducting a due-diligence on your company will require proof of compliance with Tax Laws and the Companies Act.

To keep your company in good standing with the relevant authorities and to avoid any penalties, entrepreneurs are advised to invest time in ensuring that their companies comply with both the Tax Laws and the Companies Act.

With our in-depth knowledge of the regulations and laws that apply to SMMEs, Outsourced Finance is a well suited Accountancy firm to assist your company with its compliance requirements.




Outsourced Finance is not your average accounting firm; we are here to provide small businesses with strategic financial support to help them grow. Top accounting- and financial services should be both affordable and effective, and now it is.

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