What if a business encourages cash payments?

After your doctor’s appointment, the secretary tells you that you can use your bank card to pay for the consultation, but that you will receive a R200 discount if you choose to pay cash. You find this unusual, and wonder whether it has anything to do with taxes.

We have a look at the difference between tax avoidance and tax evasion, and we consider the reasons that certain businesses would encourage cash payments. 

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The difference between tax avoidance and tax evasion

According to Motumi Ntshili, senior compliance specialist for Sage Africa and Middle East, tax avoidance involves using legislatively allowable methods to reduce your tax liability to the lowest possible level.

“These methods include setting up your company to take advantage of allowable tax deductions, or smart ways of using complex, but legal, worldwide company reporting structures to avoid being taxed on local income,” says Ntshili.

He explains that these methods are disclosed and shared with SARS, and can be audited.

“Tax avoidance is often thought of as being immoral, since each tax-paying entity has its own reasons for choosing to pay as little as possible to the government – albeit legal,” he adds.

Tax evasion, on the other hand, is an illegal practice where entities avoid paying tax by hiding their true financial performance from the government, Ntshili says.

“This may include misrepresentation of financials by underreporting profits or overstating deductions. Tax evasion is illegal and, if found guilty, tax-paying entities may be subject to fines or imprisonment.”

READ MORE: Why tax evasion shouldn’t cross your mind

Reasons why cash may be encouraged

Ntshili says that running a cash business is legal. However, he explains that making cash transactions to evade tax is illegal.

“All business transactions need to be recorded, irrespective of the payment method. Proper source documents should be issued and kept, as underreported profits are illegal,” says Ntshili.

He points out that transacting in cash may be legitimately beneficial to some businesses, such as spaza shops, market vendors, restaurants, and bars.   

“Cash payments are immediate, which means business owners don't have to wait for bank transactions to clear. It is also possible to eliminate fraud, such as returned payments that were processed via EFT and fictitious proof of payment practices,” says Ntshili.

He notes further that cash transactions allow businesses to avoid bank transaction charges. These fees attract VAT, which adds to the expense. Alternatively, as relates to card transactions, businesses may stipulate a “minimum swipe value”, to offset bank fees.

Regardless of the payment method used, Ntshili says, SARS has sophisticated methods to audit businesses with a high risk of manipulating returns.

“These may include businesses that constantly report losses, or profits that are significantly below industry trends and norms for similar types of businesses. The onus is on the taxpayer to prove they did not accept cash in their business,” he explains.

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