It might take a year and, even, a decade, but sooner or later the South African Revenue Service (SARS) will find you.  

In its 2020/21 annual report, SARS states that it “seeks to create an environment where any taxpayer is equally likely to be touched by SARS”.

That is especially the case for freelancers — also known as independent contractors — who fall under a high-compliance risk category. 

SARS exists “… [to] ensure that the tax and customs revenue due to the state is collected as and when it becomes due, by building a high level of taxpayer compliance and facilitating legitimate trade”. 

In the annual report, SARS reports that it conducted 1.5 million audits and verifications in 2020/21, compared with 1.4 million in 2019/20 and 1.9 million in 2018/19. 

A total of 76.2% of taxpayers and traders know their obligations, according to SARS. 

However, for those taxpayers and traders who find themselves at loggerheads with the Receiver of Revenue, SARS has an alternative dispute resolution process in place that is designed to be “fair and reasonable”. 

When that exhaustive alternative dispute resolution process fails, court is also an option — although not entirely favoured by SARS.

The latter can be particularly devastating for individuals, and entities alike, when considering that “… [overall], SARS won 92% of all tax appeals that proceeded to court, and were successful in all matters before the Constitutional Court and Supreme Court of Appeal”, according to the 2020/21 annual report.

Bernard Mofokeng, a tax and exchange control lawyer at CMS SA, says prevention is better than cure when it comes to freelancers’ dealings with SARS. 

“Going it alone is not advisable — get a professional to help you,” says Mofokeng, who is a founding director of CMS SA and spent a large portion of his career working at SARS. 

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If you are a freelancer, there is a high probability that you will be audited. “I have found that freelancers are audited more often than people in full-time employment,” says Mofokeng.  

That is so because “there is a high-risk factor involved with freelancers or independent contractors”, says Mofokeng, who points out that, “you might not declare all the income that you earn”. 

In addition, “if you declare income, you might declare more income than you earned and claim more expenses than what you have incurred”, explains Mofokeng.

But for individuals in full-time employment, it is less cumbersome for SARS to assess their overall income because these people get a monthly salary. 

“SARS can verify this information via employers, who submit employee returns every six months. For people in full-time employment, there are existing checks and balances to verify information,” says Mofokeng. 

For freelancers, however, SARS does not have that depth of information or those checks and balances. “That’s why SARS tends to audit independent contractors more often — these types of taxpayers are more of a risk,” Mofokeng says. 

Mofokeng has dealt with cases on both sides of the divide. The CMS SA director says there are basic steps that freelancers can follow to ensure tax compliance and to avoid financially ruinous additional taxes and penalties of up to 200%.

If you do not earn a salary and are not employed by anyone per se but generate income from multiple sources, then you are a provisional taxpayer. 

As a provisional taxpayer it is imperative that you submit correct estimates of income twice a year and exercise the third top-up option — all must be filed on time.  

“That’s one of the things that is tough for people to do when they are provisional taxpayers,” Mofokeng says. 

Mofokeng advises freelancers to track expenses and transact using cards instead of cash. This way “you can use bank statements as proof of expenditure if you are audited”. 

Freelancers must keep detailed and proper records in the event of a SARS audit. 

“People doing the audit must see that you are organised. [In such a case], it doesn’t become a big audit — it becomes a verification process. Record-keeping is key,” says Mofokeng. 

“One thing I learnt during my years at SARS is that if you do not present a simple case and explain it, auditors will move on to the next case. Make their life easy,” Mofokeng advises. 

Independent contractors can do this by providing background and giving context to the facts and figures supplied to SARS. 

“Do not assume the person on the other side understands your business. You might have certain expenses, for example, that are specific to your business,” says Mofokeng. 

“Be as clear as possible about the nature of your business by drawing a simple picture for the person on the other side looking at your documents,” Mofokeng says. 

If all else fails, Mofokeng advises that freelancers take up SARS’s alternative dispute resolution process. However, he says independent contractors must not go it alone.  

“At the initial stages, get a person who understands the process,” says Mofokeng because “it is not straightforward [to a lay person]”. 

An application lodged under the alternative dispute resolution channel must meet minimum standards and cover basic information SARS requires “otherwise, you run the risk of the application being declared invalid”, according to Mofokeng. BM/DM