The real cost of tax compliance for small businesses
The challenges for most small businesses when it comes to tax are mainly with cash flows and administration. Particularly, businesses which cannot easily raise funding with financial institutions and mostly rely on the owner’s cash reserves. This means that small businesses will always struggle if they need to fund their growth.
In addition, small business are generally faced with costs of compliance, in particular the costs of complying with tax requirements. A business that has employees and has annual turnover of more than R1 million will face the following tax compliance challenges:
1. Preparation of the annual tax returns – ITR14
2. Preparation of at two provisional returns and make provisional payment
3. Third top up payment if the two provisional payments do not cover the total tax liability
4. Monthly Pay As You Earn (PAYE) filing and payments
5. VAT returns and VAT payments at least 6 times per year
6. Payment of dividends tax on declaration of dividends
“Small organisations may not have the financial muscle to carry the costs of engaging [tax] specialists”
Big versus small
Although these requirements apply equally to big organisations, there is an argument that these organisations can afford to pay tax specialists and even set up in-house tax departments.
Small organisations may not have the financial muscle to carry the costs of engaging specialists. In addition to the above compliance requirements, the small business could also be liable for verifying that their suppliers are not personal service companies. The amounts they pay to personal service companies should be subject to PAYE.
The above administration may not apply if the business has taxable turnover of less than R1 million and has elected to be subjected to turnover tax.
Assisting SMEs with compliance costs
The Tax Review Committee headed by Judge Dennis Davis finalised their report on SMME and made a number of recommendations. Based on the 2014 Draft Taxation Amendment Bill, SMEs will be entitled to refundable annual tax rebate of R15 000. It is stated in the Bill that the purpose of the rebate is to assist these entities with their compliance costs.
It should be stated upfront that the attention given by the Tax Review Committee to the taxation of small business is to be applauded given the strategic need to encourage South Africans to consider small business as an alternative to seeking employment. The challenge is that the amount R15 000 may not be enough to cover the costs of all the compliance requirements outlined above.
Rebate in action
The example below demonstrates the cost of someone who decided to start her business that will generate a turnover of R1 500 000 and created employment for 3 people who get R5 000 per month each. In this example, the business has to comply with all the above requirements.
The owner will pay tax of just over R35 000 on their personal salary of R240 000. In addition she will pay dividends tax of R8 400 on the dividend of R56 000. Therefore, the disposable income of the owner will be R252 600.
If the business receives the refundable rebate of R15 000, it is not clear if this will be subject to tax and dividends tax when it is declared to the owner of the business. Even if this amount is exempt from tax, the owner will be more tempted to take up a job that will pay R500 000 and pay tax of R117 000 than to start a business that will generate gross turnover of R1 500 000. In this case, the disposable income is over R380 000 and there are no costs of compliance.
About the author: Zwelodumo Mabhoza is currently the head of tax at SizweNtsalubaGobod, a position he has held since January 2012. He has serviced various corporations government departments and parastatals as both tax director and partner. He has close to 20 years of experience as a legal practitioner and over 10 years in tax. He is also on the Intergritax Committee and National SAICA Tax Committee among others.