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How SMEs Can Defeat The Red-Tape Bugbear

South African SMEs see red tape – from both government and big business – as a major brake on growth. The truth is that perception and reality are often different. By seeking expert advice, SME owners can make tackling the red tape much easier, while at the same time adding to the strength and sustainability of their business.

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The South African government’s National Development Plan (NDP) identifies SMEs as primary drivers of job creation, and has set a target of 90% of new employment being created in the SME sector by 2030. Many economists agree that rapid SME growth is the only sustainable way to reduce unemployment and expand the middle class.

One would have thought that this was great news for SMEs – most South African small, medium and micro-business owners are unlikely to disagree with the policy. In practice, however, there are certain obstacles to be overcome before the majority of our SMEs will commit themselves to growth as a deliberate contribution to job creation, alongside each company’s primary aim of improved profitability.

A poll of more than 1 300 South African companies, the 2015 SME Insights Survey commissioned by the South African Institute of Chartered Accountants (SAICA), revealed that 76% of the respondents employ fewer than 20 people, and 46% have fewer than five employees.

Related: HR Management Basics For The Small Business

There was also a very interesting correlation between SME longevity, turnover and staff size. By and large, the 25% of SMEs that report turnover above R10-million per annum are also those who have been in business 5 years or longer, and furthermore they are the firms likely to be employing more staff. Only 1% of the sample claimed a turnover above R500-million per annum, and 1% also employ more than 1 000 people.

The implication is clear: If SMEs are to be engines of job creation, the task will be accomplished by SMEs that have survived long enough to achieve substantial annual turnovers on a sustained basis. The government is to be commended for supporting micro enterprises, but their job creation goals will need a new focus.

Longevity vs employment graph

Longevity vs turnover graph

Barriers to SME growth

These statistics make sense. Most small and medium enterprises actually begin as micro enterprises, with just one out of two entrepreneurs forming their own company. For the first two or three years, they will be totally focussed on the challenges of creating a sustainable business: Funding, production, distribution, cash flow, and market penetration. In many cases, entrepreneurs are also breadwinners, so their immediate priority is providing for their dependants.

This is not to say that they cannot also perform a socially conscious job creation role, and be committed to the NDP vision; but the harsh economic reality is that they cannot afford to focus on providing jobs for others until they are sure that their business will be able to continue supporting them and their families. And they will not be turned into job creation machines until government provides compelling incentives for them to do this.

More than 60% of SMEs fail within their first three years. A rational conclusion from all this data is that supporting and mentoring existing SMEs who have survived three or more years, so that they can achieve the longevity and turnover that allows them to employ more staff, would be an important policy direction, and possibly a more rapid road to the achievement of the NDP goals than a concentration of funding on thousands of new micro-enterprises.

starting a business barrier

Asked to identify the biggest barrier to entry when starting a business, respondents said the three primary obstacles were government red tape, access to funding and red tape when dealing with big business. If these factors make starting a business harder, it is logical to infer that they remain a deterrent as a business grows, bringing with it more red tape and the need to fund further expansion.

It is hoped that policymakers will take the findings of the 2015 SME Insights Survey into account when trying to formulate policy that will help SMEs address these obstacles, but at the same time, SMEs themselves can take proactive steps to lessen their impact.

By engaging the services of a Chartered Accountant (South Africa) [CA(SA)], an SME owner can lighten the dual burdens of dealing with red tape and the acquisition of funding, while at the same time getting sound business advice that will increase their chances of long-term success.

Related: Getting Your Growth On

SMPs offer multiple benefits

A significant number of CAs(SA) work in small and medium practices (SMPs), providing financial and accounting services to other SMEs. But the value they can offer to these SMEs goes beyond the bookkeeping and tax consulting that most small business owners see as their primary function.

As successful South African entrepreneur Alan Knott-Craig Jr put it when asked about the value of his CA(SA) qualification: ‘There’s a lot of admin that isn’t fun when you’re setting up a business: Registering a company, getting a trademark, doing legal agreements, cash-flow management, accounting, etcetera. All of that gets taught to CAs(SA) – you get so comfortable with statutory company secretarial and regulatory accounting work. It’s something non-CAs(SA) don’t pay much attention to when they get their own small businesses off the ground. And then one day they forget to pay VAT, and SARS comes and takes out their business. A CA(SA) is not going to drop the ball in those areas.’

For many entrepreneurs, the first problem when dealing with red tape is knowing what red tape is even relevant; a consulting CA(SA) will have all that information at their fingertips, whether dealing with government or big business contracts. For example, 55% of the companies in the 2015 SME Insights Survey either do not know how they will be ranked under the latest Broad-Based Black Economic Empowerment (B-BBEE) codes, or presume they will be non-compliant.

Another 12% are unsure if their status will even change. Yet under the new B-BBEE codes, any SME with a turnover less than R10-million per annum qualifies as an Exempt Micro Enterprise (EME), and as such receives an automatic B-BBEE Level 4 or better rating, allowing it to bid for contracts with government and big business. A full 75% of the businesses surveyed qualify as EMEs, and any CA(SA) would be able to tell their owners that they can achieve Level 4 status simply by submitting an affidavit about their turnover.

Business and funding assistance

Apart from the ability of CAs(SA) to deal with red tape, South Africa’s small business bankers agree they can be a great help in mentoring and advising small businesses with an outside perspective – and even in helping to prepare them to be attractive prospects for bank funding.

Thakhani Makhuvha, CEO of the Small Enterprises Finance Agency, thinks that SMEs could consider contracting SMPs to perform the functions of a non-executive director, without a formal appointment to the role. ‘It would be a significant value-add,’ he says. ‘

A small company might not be able to understand the risks that they are facing – it might be in invoicing, creditors, filing, following up with the debtors, etcetera. An audit firm that will provide that insight will definitely be adding value to the small business – if those risks are identified and mitigated, it gives us a firm degree of confidence. You don’t have to be appointed a director – just an independent person who is behaving like a director, questioning the strategy and viability of the business on an on-going basis.’

Related: Funding And Resources For Young SA Entrepreneurs

As Makhuvu’s remarks illustrate, advice and mentorship from a CA(SA) can also help SMEs overcome another barrier: Finding funding. A 2014 survey of all the major SME funders in South Africa revealed that the input of a CA(SA) was seen as a positive advantage, and that lenders felt more secure about providing finance to SME owners who were prepared to rely on qualified guidance and expert financial oversight.

‘If a lender knows you’re a CA(SA), they talk to you differently; it’s just a fact,’ says Alan Knott-Craig Jr. ‘The CA(SA) designation provides instant business credibility.’

The conclusion is readily apparent: entrepreneurs, who want to build long-running, profitable SMEs that can eventually turn into large enterprises and employ significant numbers of people, need to be able to handle red tape and applications for funding along with all the other financial and strategic minutiae of business, both on a day-to-day basis and within a long-term strategy. They would do well to consider consulting a CA(SA) to provide value advice and expertise in all these areas.

If you’re an SME and would like to participate in the 2016 SMME Insights Survey commissioned by SAICA, click here: 2016 SMME Insights Survey

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Entrepreneur Today

3 Stealthy Tax Hikes Payroll Managers And Employees Need To Take Note Of

By Rob Cooper, tax expert at Sage, and chairman of the Payroll Authors Group of South Africa

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“Dammed if you do and dammed if you don’t.” 

The adage summarises the difficult decisions government and the Finance Minister faced when balancing the country’s books, rescuing state-owned enterprises, and reviving the growth of our economy. Given the economic pressure that most taxpayers are facing, government ideally needed to achieve all of that without direct increases to personal income tax in the most recent Budget Speech.

Personal income tax has comprised at least a third of South Africa’s total tax revenue in recent tax years, despite growing unemployment. The 2019 Budget, presented in February, forecasts that personal income tax will account for nearly 39% of tax collected during the upcoming (2019/20) tax year. Given that we are in an election year and that the tax base is fragile, it’s not surprising that the Finance Minister and the National Treasury avoided direct increases to the statutory tax tables used to calculate PAYE for employees in the budget.

Nonetheless, government has made inflation work in its favour to impose some tax increases by stealth. Here are three ways government is raising more revenue without direct tax increases:

1. Bracket creep

The statutory tax tables used by payrolls and employers have not been changed for 2019/20, nor have the brackets been adjusted for inflation. This effectively amounts to an indirect tax increase that will yield a revenue saving of approximately R12.8 billion for government’s coffers.

It is not unusual for government to use ‘bracket creep’ to effectively raise more revenue. But unlike previous tax years, even low- and middle-income earners are not getting much relief. Rebates and the tax threshold are being increased by small amounts to allow some relief, but many people this year will feel the pain as inflationary salary increases push them into a higher tax bracket.

2. Medical aid credit not adjusted for inflation 

As proposed in the 2018 Budget, the Finance Minister did not apply an inflationary increase to the Medical Tax Credit, which allowed him to raise an extra R1 billion in revenue for the year. Surprisingly, these funds will be allocated to general tax revenue rather than ring-fenced for healthcare. In previous tax years, revenue generated from below-inflation increases on medical scheme credits was used to fund National Health Insurance (NHI) pilot projects.

There is still no clarity on how the NHI is going to be funded except for a general statement that the funding model is a problem for the National Treasury to solve, and that the principles of cross-subsidisation will apply. One wonders if any real progress will be made soon, given the fiscal constraints government faces.

3. Business travel deduction left untouched

The Budget leaves the per-kilometre cost rates used to determine tax deductions for business travel untouched. By not increasing travel rates to account for inflation, government effectively increases income tax collection at the cost of the taxpayer. This will be a blow for people who need to claim from their employers for business travel in their personal vehicles. This change has slipped through largely unnoticed and the budget does not provide numbers for the expected increase in tax revenue.

Closing words

Amid political turmoil and uncertainty, the Finance Minister presented a balanced budget for 2019/20 that offers hope for the future along with some tough love. With government taking steps to accelerate economic growth and improve revenue collection, we should hopefully see a steady improvement in government finances, which will translate into less pressure on the taxpayer in future years.

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Entrepreneur Today

SMEs: Staying On The Right Side Of The Taxman

Remaining SARS compliant can be a constant challenge for small- to medium-enterprises (SMEs), especially when they are trying to focus on growing their businesses and streamlining their operations.

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EasyBiz Managing Director, Gary Epstein, says submitting taxes can be a seamless process that does not have to take up more time than is necessary. “If business owners understand what is required of them and they put a few processes into place to deal with their tax submissions properly, their lives will be so much easier.”

What are the top three considerations for SMEs when submitting tax returns?

“Firstly,” says Epstein, “SARS returns must be accurate and submitted in terms of the relevant Act. Secondly, returns should be submitted and paid on time to avoid unnecessary penalties and interest, and thirdly, business owners must follow up on queries issued by SARS. “Do not ignore these queries, act on them as soon as possible”.

What are the major SARS submission deadlines for SMEs?

Epstein points out that small business owners need to adhere to various tax deadlines, each with their own particular dates for submission. “It is important that business owners diarise the dates (and set advance reminders for themselves) and/or enlist the services of an accountant or financial adviser to help them keep abreast of requirements.”

Value-added tax (VAT)

VAT payments need to be submitted in the VAT period allocated to the business, according to various categories and ending on the last day of a calendar month. This may mean making payments once a month, once every two months, once every six months or annually, depending on the category.

Provisional taxes

Provisional tax should be submitted at the end of August (first provisional) and at the end of February (second provisional) – for February year-end companies.

Employee taxes

In addition to submitting an annual reconciliation (EMP501) for the period 1 March to end of February for Pay-As-You-Earn (PAYE), Skills Development Levy (SDL) and Unemployment Insurance Fund (UIF), employee tax, in the form of an EMP201 return, needs to be submitted by the seventh of every month.

When can SMEs get extensions and is it worth it?

Epstein says SMEs can apply for various extensions, but these are subject to the Income Tax Act and Tax Administration Act.

“It is best for SMEs to consult their tax professionals to get advice regarding extensions for their businesses.”

What is SARS not flexible about?

SARS is not flexible when it comes to late returns and late payments.

“I cannot stress enough how important it is for SME owners to ensure their tax returns are submitted on time. In this way, they will avoid the inconvenience and expense of additional fines and interest,” notes Epstein.

What skills do SMEs need in their organisations to be able to submit to SARS efficiently?

Business owners often don’t have the time or expertise to deal with tax submissions throughout the year. If the business cannot afford to employ a full-time accountant or financial services expert, it would do well to outsource its tax requirements to a registered tax practitioner.

“I would recommend that even if they are not submitting the tax returns themselves, business owners should have a broad understanding of the tax regulations and what is expected of them. There is a lot of helpful information on the various Acts and tax requirements on SARS’ website,” says Epstein.

How does the right software help SMEs remain SARS compliant?

SME’s (and their accountants’) jobs can be made easier by using reliable accounting software to calculate accurate VAT reports. These reports are only as accurate as the data entered into them, which means care needs to be taken when inputting data into the accounting programme. Epstein says a good accounting software package must be reliable, easy to use and functional.

“SMEs need to check that the software has thorough reporting capabilities and can interface with other software solutions. Of course, it is also important to find out whether the software is locally supported by the vendor or not.”

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4 Dangers Of Business Under-insurance

A common short-term insurance peril that many SMEs face when submitting a claim following an insured event is the risk of being underinsured.

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Malesela Maupa, Head of Products and Insurer Relationships at FNB Insurance Brokers says, many small business owners mistakenly believe that by merely having a short-term insurance policy in place they are adequately protected against unforeseen events.

“This is technically correct provided that the business is covered for the full replacement value of the items insured. However, in circumstances where the sum insured does not cover the full replacement value or material loss of the item insured, the business is underinsured,” explains Maupa, as he unpacks the dangers of business underinsurance:

1. Financial loss

The most common risk is financial loss on the part of the business. If the business is underinsured or the indemnity period understated, the short-term insurance policy will only pay out the sum insured for the stated indemnity period as stated in the schedule, with the business owner having to provide for the shortfall. This often leads to cash flow challenges, impacting profit margins or rendering it difficult for the business to recover following the financial loss.

2. Reputational damage

Should an underinsured business not have sufficient funds to replace a key business activity or critical component following a loss, this may impact its ability to fulfil its contractual obligations, leading to a loss of business or market share, and irreparable reputational damage in the worst-case scenario.

3. Legal action

A small business also faces the risk of customers or clients taking legal action against it, should it fail to deliver on goods and services following a loss or be unable to honour its financial commitments that they committed to prior to the loss.

4. Survival of the business

A catastrophic event such as fire, which could result in the loss of stock or company equipment and documentation, could threaten the survival of a small business that is not yet fully established, if the business assets are not adequately insured.

Working with an experienced short-term insurance broker or insurer is essential when taking up short-term insurance to ensure that business contents are covered for their full replacement value.

Furthermore, depending on the nature of the business or item insured, the policy should be reviewed on a regular basis to avoid underinsurance as the value of items often change overtime due to fluctuations in economic activity. Where it’s necessary, evaluation certificates need to be kept up to date.

“Lastly, SMEs should ensure that the sum insured does not exceed the replacement value, which would lead to over insurance. Should a business submit a claim following a loss, the insurer would only pay out the replacement value, regardless of the higher sum insured,” concludes Maupa.

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