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‘SMEs need bolder tax concessions’

Questions remain about abuse and tax gap in the sector.

The existing tax concession for small business corporations (SBCs) is welcome, but if government wants the sector to flourish and facilitate job creation, it has to be bolder in its approach, tax practitioners have argued.

Speaking at the Tax Indaba, Faith Ngwenya, technical executive at the South African Institute of Professional Accountants (Saipa), said small business corporations were paying tax of 28% on their taxable income above R550 000, which was equal to the corporate income tax rate.

“If we really are serious as a country that we want to see small businesses growing, we need to reconsider that. We need to be thinking out of the box.”

The special tax regime for small business corporations was introduced in 2001 to encourage development and investment.

The National Development Plan envisages that small businesses should provide 90% of new jobs by 2030, but while the sector is seen as an engine for economic growth and job creation, it also poses a significant challenge for revenue collection authorities. The tax gap – the difference between taxes owed and taxes collected – is a problem in parts of the small business sector due to the relative ease with which cash transactions could go unreported.

Veli Ntombela, head of tax at SizweNtsalubaGobodo, said some of South Africa’s neighbours offered tax holidays of ten or 15 years for investments that facilitated job creation.

“Why can’t we do the same in South Africa for small and medium enterprises?”

He applauded tax concessions offered for small business corporations, but said to encourage employment, the provisions had to be amended to reduce tax rates even further where small businesses employed larger groups of people. Government could potentially also offer tax holidays.

“We have to be creative.”

John Hanssen, senior manager for product oversight and small business at the South African Revenue Service (Sars), said according to the most recent tax statistics, around 102 000 small business corporations were in operation.

Thirty-four percent were in an assessed loss situation and 15% were at break-even point. Around 52% collectively had taxable income of roughly R14 billion, with assessed taxes of R1.9 billion.

Hanssen argued that the SBC regime was working, that it facilitated some job creation and stressed that relatively bigger businesses with gross income of up to R20 million qualified as well.

“It is not just for small guys.”

Ngwenya said red tape was one of the reasons for the high failure rate among small businesses. Requirements that small businesses have to be VAT registered to do business with government was one of these hindrances.

Hanssen said over the last three years, new VAT regulations were introduced and where businesses earned income of less than R50 000 and met certain conditions, they could apply for a VAT number.

However, there were also businesses that abused the regulations by hiding their businesses in smaller businesses to remain under the threshold, he added.

To reduce the tax compliance burden, a VAT vendor category (F) was previously introduced for businesses who only filed returns three times a year.

“That has been scrapped. People weren’t using it. Why? Because they want their money [VAT refunds] quickly.”

The simplified turnover tax system for micro businesses was also an option that was available, Hanssen said, but people weren’t using it.  

Deon van Zyl, partner at PKF, said while there were several tax concessions available for small, medium and micro enterprises, the cost of compliance also had to be considered. If small businesses had to employ highly-skilled tax practitioners to assist them with compliance, it was likely they would remain non-compliant. 

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One of the easiest ways (assuming that a startup could be defined fairly) is to increase the maximum in respect of capital items purchased, that may be deducted as an expense at the time of purchase. The cash flow effect of a spread-out deduction by way of wear-and-tear allowances works heavily against a small business with a low level of funding, or expensive funding.
Secondly, VAT for an incorporated small business could again be treated on the cash basis. Debtors who do not pay on time can effectively ruin a small business if the invoice basis applies, because the net VAT has to be paid over whether or not the debtor who owes the output VAT, has paid its account yet.
SARS used to allow the invoice basis for companies but no longer does so.

These are simple changes that would have a strong effect immediately.

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