If you can buy insurance against something as inevitable as your own death, why not against that other great certainty, taxes?
A small company, Qdos Consulting, recently received a licence to sell what it calls “revenue enquiry insurance” in South Africa. For as little as R220 a year, individual taxpayers can cover themselves against a tax audit of their books by the South African Revenue Service (Sars) — not against additional taxes or fines, but against the expense of hiring an auditor, accountant or lawyer to represent them in a dispute that might arise with Sars.
Qdos business development director Darren Nash says the insurance payout is capped at R50 000 for individuals and covers professional fees incurred through anything from preparing for a tax audit to legal representation at the tax court.
For businesses, the insurance can pay out up to R250 000. Close corporations and owner-managed businesses can expect to pay R650 to R850 a year for the cover, while large corporations pay anything from R1Â 200 to R6 000 a year, depending on the risk of being subject to an audit.
Nash says the product, underwritten by Johannesburg-based Renasa, will be sold wholesale to accounting firms and tax consultancies, which can on-sell it to their clients.
It’s early days still, says Nash, who received his insurance licence in November. So far, the Nolands Group accounting firm, which was involved in bringing the product to South Africa, has signed up about 1 500 clients for the insurance, two of whom have had claims settled already.
Nash says that despite the fleeting introduction of his product into the accounting industry, “the interest is huge”, but adds that there have been some initial objections. Some business people have said: “Ag God, we don’t want insurance.”
His sales pitch to accounting firms is that they can use it as a client-retention strategy — in the United Kingdom a client won’t hire an accounting firm unless it offers the insurance, says Nash — as well as an additional income stream. A firm that on-sells the insurance at a slight premium to its clients can turn a small profit on it.
The accounting firms’ marketing pitch to their clients centres on the certainty of death and taxes, especially since Sars’s move towards self-assessment and e-filing. They say the thousands of paper-pushers who used to work with the documentation that taxpayers had to provide with their tax returns are being retrained as field officers to audit taxpayers for accuracy.
Alicia Smit, tax manager for Nolands Greamor in Durban, says: “We’ve had some correspondence from our Cape Town office and they’ve said there have been 8 000 audits issued just for KwaZulu-Natal alone.”
Top Sars officials, commenting on the new insurance, deny that an avalanche of new tax auditors will be unleashed on the public. Retraining is taking place, but not all will become field officers, says Edward Kieswetter, Sars chief operating officer.
Franz Tomasek, Sars general manager for legislative policy, points out that Sars’s change to self-assessment was a response to the increase in the number of taxpayers. A proportional increase in tax auditors can be expected, but an individual’s chances of being chosen among the increased multitudes for a tax audit are likely to remain the same.
News of the existence of the insurance does not appear to have reached Sars yet. Officials reacted with surprise and amusement on first hearing of it, but official disapproval of the scheme seems unlikely. Tomasek says the only possible opposition might come if it encourages taxpayers “to push the limits” of legality when they plan their tax.
But Qdos documentation makes it clear the insurance will not pay out when Sars alleges fraud or intentional tax evasion on the part of the taxpayer. The fact that it is sold through accounting firms protects the insurers from taxpayer troubles stemming from ignorance or neglect of bookkeeping.
Perhaps an indication of the underdevelopment of the new insurance is several puzzling clauses in the policy document. One states that the policy won’t pay out in case of a “routine inspection” by Sars. But Nash is adamant that it will pay out in case of a random audit by tax officials.
Another clause caps the payout to R2 500 if Sars queries a taxpayer’s use of a tax avoidance scheme, unless the insurer approved of it first. But what constitutes a tax avoidance scheme can be a function of subjective interpretation, so the clause seems to give the insurer leeway to turn down claims when the policyholder most needs it.
When asked about this, Nash first said the clause will be scrapped altogether, but later said it will be changed as part of a review undertaken by the underwriters to adapt the document to the South African tax system from its British origins.
Nash says the hardest part of introducing the insurance to the South African market is not convincing accounting firms of its merits, but assessing the risk presented by each individual client of the firm once it has signed up.
Whether the insurance will become as ubiquitous here as in the UK where, Nash says, 12 firms flog the product to taxpayers, remains to be seen. With Sars’s image as an effective organisation undiminished, it might very well. And, if nothing else, the insurance premium can be deducted from a business’s taxable income.
Under the microscope
Now that the South African Revenue Service has shifted the responsibility of assessment on to the taxpayer, an increase in random tax audits is certain, but Sars refuses to say by how much.
About 8 500 Sars officials previously involved in assessments and the processing of documentation, which taxpayers were obliged to send in with their returns, are being retrained, but not all of them will be added to the 2 500-strong army of Sars tax auditors, says Sars chief operating officer Edward Kieswetter. Some will be retrained as customer service staff and educational outreach officers, he says.
In contrast to the marketers of a new insurance product against tax audits, who warn of a sharp increase in random audits, Kieswetter downplays the changes taking place in Sars as part of the “constant evolution” of the taxman’s risk management.
Although he confirmed that Sars’s “capacity to do post-assessment audits” will be strengthened, he suggests the emphasis will be on a more intelligent choice of audit targets.
Value-added work includes servicing the public face to face, educational outreach and audits. Manual work includes “shuffling paper, capturing stuff, sorting stuff”. Computers can do this better than people, says Kieswetter, which is why Sars has introduced scanning technology to capture information off tax returns. — Barrie Terblanche