Building Blocks - JSE MAGAZINE

Building Blocks

The latest Davis Tax Committee report recommendations aim to simplify the small business corporation and turnover tax systems, but it will take a while before they are implemented

Building Blocks

Tax advisers agree that the latest recommendations by the Davis Tax Committee (DTC), in its report Small and Medium Enterprises Taxation Considerations of April 2016, are aimed at ensuring that the tax system promotes SME activity rather than hindering critically needed growth in this key sector through high costs of compliance. Tertius Troost, tax consultant at Mazars, says that to grow an economy, governments need to invest in SMEs. These are critical spaces that promote growth and employment, particularly in a country such as SA with an unemployment figure of 27.7%, a youth unemployment figure of 38.6% and an expected growth rate south of 1%.

‘The latest DTC recommendations seek to simplify the small business corporation [SBC] and turnover tax systems, VAT for small businesses, and other developments so that companies that usually struggle for funding and often battle to keep their heads above water can focus on non-taxation areas that will earn revenue’, says Troost.

However, Robyn Armstrong, associate at Werksmans Attorneys, points out that the DTC’s recommendations regarding SMEs specifically state that the proposals contained in the report will be subject to the normal consultative processes and parliamentary oversight once announced by the Minister of Finance. The announcement will take place in the Budget Speech in February each year.

‘It must be noted that just because a change ` is announced in the Budget Speech, it does not always result in such change manifesting in that same year’s legislative amendments. SARS and National Treasury may [want] to introduce amendments to curb certain tax practices but it can happen that the technicalities of drafting appropriate legislative provisions to address such amendments take several years to get right.’

Any changes will also first allow for the views of stakeholders to be taken into account, she says.

The DTC reported that the SBC tax system is ‘fundamentally ineffective’, says Deborah Tickle, tax adviser and partner at KPMG.

‘The committee feels a large proportion of the tax benefit is enjoyed by service-related SBCs such as financial, education, real estate, medical and veterinary services, albeit those with three or more non-connected employees. This was never the intention of the SBC initiative.’

Tickle explains that the DTC report provides various options for the SBC regime such as the retention of the current SBC tax regime along with having to accept the potential for abuse and the enforcement problems this entails, removing the SBC regime completely and redeploying the resource (additional tax) within the Department of Small Business Development (DSBD) or the Department of Trade and Industry by way of targeted interventions. She says another option, according to the report, is the extension of the current SBC resource to all tax-compliant SBCs through a refundable compliance rebate (RCR) system.

‘This would involve SBCs paying tax in the same manner as all other corporates, but those that achieve compliant taxpayer status will be refunded a portion of the tax paid in the form of the RCR. Compliant status is suggested as all tax returns – income tax, employees’ tax and VAT – having been submitted within nine months of year end. This rebate is designed to effectively refund some – or a portion – of a qualifying company’s costs of achieving compliance.’

Tickle says it’s suggested this would amount to R0 for companies with a turnover under R335 000 (on the assumption the turnover tax system is adopted), R10 000 for turnover between R335 000 and R500 000, R15 000 for up to R1 million and R20 000 thereafter.

‘Although the principles behind the RCR are honourable in that it’s designed to encourage compliance, it is debatable whether SMEs will really see this as assisting them in their plight to survive the difficult environment they face, especially since they will need to pay tax before they even receive the refund. This would disadvantage SBCs’ cash flow. They would still have to deal with the burden and complexity of complying with the tax rules and documentation – one of the main burdens cited by the DSBD as being a hindrance to SMEs.’

So far, she says, SARS and National Treasury have opted to follow the first option. ‘They will need to consider the potential impact on small businesses of options two and three carefully before making any changes.’

Regarding the compulsory VAT registration threshold, Troost explains that taxable supplies above R1 million in a 12-month period compares favourably to international changes and therefore no changes are required. As for VAT refunds and long-outstanding debts, recent delays by SARS in terms of VAT refunds have been a most contentious issue.

‘The DTC understands that cash flow is vital to small companies. It proposes the introduction of a debtors’ allowance where SMEs are allowed to adjust the VAT computation for balances that exceed 90 days.’

Troost also points out that National Treasury has not yet implemented the registration of the DTC’s recommendation that a micro business voluntary disclosure programme for non-compliant SMEs be established.

‘The DTC identified that the risk of SARS claiming arrears taxes was a reason for SMEs remaining non-compliant. This would mean that when a person registers a micro business, the arrears tax claim would be waived for the period prior to 1 March 2015.

‘However, the DTC does state that the VCC [venture capital company] regime does little to grow micro businesses and that the legislation is aimed at established SMEs.

‘What the DTC recommends is the creation of a separate tax incentive to encourage angel investors in SMEs,’ says Troost. ‘This may be achievable through the extension of the bad debt allowance to allow for the full write-off of failed investments in micro businesses.’

Troost says the DTC understands that businesses in the SME sector require funding/investment and recommend changes to the Small Business Funding Entity and the VCC regimes, adding that ‘better uptake of these regimes will increase funding and investment in the sector’.

Piet Nel, technical adviser to the South African Institute of Tax Professionals, says as in the DTC’s first report, the compliance burden is still widely identified as the primary ‘tax problem’.

He points out that the current incentives for SMEs mean that registered micro businesses pay tax on their taxable turnover at a low rate of no more than 3%, and have reduced record-keeping and compliance obligations.

‘Section 12E SBCs can write off the cost of most of their assets used in their businesses faster than other taxpayers. They also enjoy the benefit of paying tax at lower rates on the first R550 000 of taxable income.’

He adds that the committee’s proposal of making use of the refundable compliance rebate to alleviate compliance cost will ‘certainly’ put money back in the hands of small businesses. ‘But the problem is that, other than where the taxpayer is a registered micro business, the benefits of being an SBC is available to private companies only. A sole proprietor or partnership can’t enjoy this benefit, and these businesses are therefore still forced to register a company if they want to get access to the tax benefits.’

Furthermore, the proposal to take the benefits of the SBCs in the service industry away is problematic. ‘A lot of small businesses are rendering services and not only in the professional service space. New businesses providing services may be reluctant to incorporate due to the risk that this proposal will be implemented, and the tax benefits of incorporation will be lost. This concurs with the DTC’s assertions in its first interim report that the easier the tax aspects of doing business as an SME are, the better.’

Nel expects enterprises to still have to register as VAT vendors when the value of their taxable supplies exceeds the current R1 million threshold.

‘This will not be changed or extended. It means taxpayers in the service industry risk losing benefits, their administrative compliance burden is not relieved, money given by way of the refundable compliance rebate will not really bring relief and no relief for cash flow concerns and funding of SMEs seems to be forthcoming. The potential benefit of writing off the value of assets brought into operation is also limited due to the cap on the value of such assets.’

Nel says the proposal to increase the value of small assets that may be written off in full can be implemented in the current binding general ruling and doesn’t require an amendment to the Income Tax Act.

However, it will take time before a new SBC tax regime can be implemented. Arnaaz Camay, senior executive of tax at Baker McKenzie, says the DTC proposal to opt for an RCR system in the form of an annual rebate, provided the SBC is tax-compliant (among other options), would need to be incorporated into the Income Tax Act.

Carnay says: ‘The recommendations therefore need to go through Parliament and should it come to that, businesses will be able to make representations by way of a public participation process.’

By Louise Brougham-Cook
Image: Gareth van Nelson/HMimages