The single most expensive mistake a small business can make is using VAT or PAYE money to cover cash flow gaps, according to Darlene Menzies of SMEasy and Kantha Naicker of Evolve Accounting. The penalties are steep, and the fix is almost always communication.
Why using tax money as cash flow backfires
Interest on overdue VAT is levied at a prescribed monthly rate, with a further penalty on top, and PAYE carries daily interest plus its own penalty. For deliberate non-payment, SARS can impose an additional penalty of up to twice the outstanding amount, penalties severe enough to sink an otherwise viable business.
If you’re already behind, don’t go quiet
Avoidance is the worst response. Contacting SARS directly and discussing the situation openly signals you aren’t evading your obligations, and in many cases SARS will agree to defer the debt or accept payment by instalment, since it is in their interest for the business to stay operating and eventually pay.
Frequently asked questions
What is the biggest SARS mistake small businesses make?
Using VAT or PAYE money collected on SARS’s behalf to cover general business cash flow, rather than ring-fencing it.
What happens if I pay VAT or PAYE late?
Interest accrues at a prescribed rate plus an additional penalty, and for PAYE, interest compounds daily.
What should I do if I’ve already fallen behind on SARS payments?
Contact SARS directly without delay rather than avoiding them. Payment deferral or instalment arrangements are often possible.
Does SARS want small businesses to fail?
No. SARS generally prefers a business stays operational so it can eventually recover what it is owed, which is why open communication tends to work in a business’s favour.
How can a business avoid falling into this trap in the future?
Close, daily cash flow management and ring-fencing tax money from operating funds from the outset.
Further reading: What is CIPC? Registration and fees explained
Originally published in 2016. Updated September 2026.
