If the 1 April VAT increase gave you a massive administration headache, you may well be experiencing symptoms of a more sinister IT illness, says Stephen Corrigan, MD of Palladium
Many businesses are still suffering from the admin blow delivered by the 1% VAT increase that came into effect on 1 April, and some food and beverage businesses as still struggling with the new Sugar Tax as well.
And their headaches are only getting worse as May ushered in further legislative changes in the form of the GDPR.
The sad truth is that much of this stress and suffering could be easily avoided. But because the health of many – if not most – South African businesses is still compromised by outdated legacy accounting systems, they will keep experiencing painful symptoms of administrative illness, that could one day prove fatal.
Why? Because legacy systems simply aren’t equipped to adapt to legislative changes like these – in fact, many of them don’t even have their own developers.
Think of the extensive changes your business would have been burdened with from 1 April.
The VAT hike headache
Because the VAT percentage is based on when a service is delivered and not when the invoice is generated, you would likely have had to invoice at two different rates.
You could even have instances of 0%, 14% and 15% VAT rates on capital on just one invoice – a nightmare by anyone’s standards.
Because of this, complying to the new VAT rate is not as simple as updating your VAT from 14% to 15%, as this would likely have consequences on outstanding transactions that still need to be processed at 14% after 1 April.
To move forward you would need to create new 15% tax types, for every 14% tax type you had.
For most businesses, this would have involved creating new VAT Input, VAT Output, Bad Debts, and Capital Purchases, as well as any other tax types required by SARS.
If you are using a legacy accounting system, you would quickly have discovered though, that they aren’t designed to cater for changes to VAT, nor are they able to handle large master files, and therefore different tax types.
Backdated supplier invoices are the business norm
So, while you might have considered simply changing the rate on your VAT from 14% to 15%, you would then have experienced a problem each and every time you backdated a supplier invoice, and had to go and change the setup of that rate to cater for 14%.
Yes, you could probably have done this manually, but what a mission it would be.
It would have required taking into consideration each and every sales order, sales quote and purchase order that was at the 14% rate at the time of creation.
This is a nuance which not every business will have thought of, and certainly not one for which legacy accounting systems cater.
The problem filters down to historical reporting as well. Your customers, for example, would have wanted to be able to see which rates were charged at 14% and which were costed at 15%, without having to calculate each time.
Outdated tech comes at a cost
Finding yourself at the mercy of outdated accounting software is about more than just the administration nightmare – it can also come at significant cost to your business.
Think about, for example, the potential for error.
Because you now have open documents converting, for example from sales orders to sales invoices, you have to remember to go in and change every single line. SARS will be well on top of any non-compliance in this area, and the last thing you want is for your business to incur resulting penalties.
Systems must be agile enough to adapt
Your accounting system should be flexible enough to cater for pending transactions as well as actual transactions. The scary thing is that this is not a feature in many older solutions, despite this process being made really simple when using modern systems like Palladium – because our technology is so agile it can adapt to these changes.
Often it comes down to your systems provider being able to provide local support. For example, as a South-African-based company, Palladium knew about the proposed VAT hike and was able to adapt its applications to create a seamless period of transition for its customers.
It should only take you 30 seconds
Instead of our customers having to update the master files with new tax codes, they were able to run a 30-second function for which we had written the full utility.
Non-local accounting solution service providers might not think of the ramifications of changes to South African legislation in that much detail, because our market doesn’t constitute a significant portion of their business. For organisations to whom South Africa is merely a speck in the global market, these kinds of updates to the software are not a priority.
A new headache is already forming
The terrifying reality is that finding yourself ill-equipped to deal with the VAT hike is just one small symptom of trying to operate using a legacy accounting system.
Think, for example, of the GDPR which came into play on 25 May.
Though it’s a piece of European legislation, it will affect any South African business that processes the personal data or monitors the behaviour of EU residents.
Among the requirements set out in the legislation, is the responsibility for companies to process personal data in a manner than ensures appropriate security of that data.
The fines for non-compliance are significant, reaching up to €20-million (R293, 5-million) or 4% of a company’s global annual turnover, depending on which is higher.
Businesses using legacy systems won’t be able protect clients’ personal information. Why? Because legacy systems store data in flat-file databases, meaning every user is able to open, copy, amend or even delete data. This leaves you with virtually no database security.
Companies should aim to avoid experiencing these types of administrative maladies again and again – while understanding that they could eventually take a massive toll on the health of your business. You need to get to the root of the problem and make sure your accounting system is strong, healthy and up to date.