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Making Government Business More Attractive To SMEs

73% of the companies that responded to SAICA’s annual SME Insight Survey do no business at all with government, at any level. There are a number of reasons for this; some of which government can be commended for addressing, but others that could still benefit from action by policymakers.

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The South African Institute of Chartered Accountants’ (SAICA) annual SME Insight Survey, which is part of SAICA’s continued commitment to government’s National Development Plan (NDP) objective of using SME growth as a driver of employment, enables the institute to present evidence for dialogue with policymakers to suggest ways to facilitate such SME growth.

The 2015 survey attracted more than 1 300 responses from business owners. The increase in this figure, from 800 respondents in 2014, indicates that many SMEs are eager to engage government on policy decisions that will affect their chances of long-term sustainability and individual company growth – which, the research also indicates, is the only way to turn SMEs into mass job creators.

The 2016 survey is currently calling for SMEs to participate, and thereby to voice their wishes regarding the policy conditions that government could change. Changes to government policies over the past two years indicate that this type of pressure helps to give the minister more power to influence change. SMEs wishing to participate should find the survey here: 2016 SMME Insight Survey

Of the companies who participated in the last survey, those employing the highest staff complement are invariably those SMEs with the highest turnover. Clearly if these companies could increase turnover they would employ many more people.

Related: How SMEs Can Defeat The Red-Tape Bugbear

What many SMEs are not eager to do, the research makes clear, is to grow their businesses by doing business with government, at national, provincial or municipal level. 73% of respondents do no business with any government agency whatsoever, and a further 15% rely on government contracts for less than 10% of their turnover.

Only 8% derive more than 25% of their turnover from government business.

This is even more anomalous when considered alongside the fact that 38% of the SMEs surveyed have BBBEE ratings of 4 or better (under the previous regulations), which qualify them to compete for government tenders at a time in which the state is spending enormous amounts on development, and is ostensibly building a procurement engine that favours transformed SMEs.

The 73% who do no government business at all were asked to rate their reasons for this, and the general consensus identified a number of key perceived barriers:

  • That the tender process is too onerous, and is not transparent
  • That government institutions are too slow to make decisions
  • That government takes too long to pay invoices, especially to SMEs, which have the most sensitive cash-flow
  • That they cannot meet BBBEE requirements, or that the BBBEE certification process is too onerous.

SME government business contracts

Changing perceptions: Government is listening

This is not the first time these issues have been raised, and it appears that government is responding proactively in a number of areas. In his 2015 Budget speech, former Minister of Finance Nhlanhla Nene announced his intention to create one portal for doing business with government; a central tender registry that will allow SMEs to register with all the requisite paperwork once, and henceforth apply for tenders without having to repeat the red tape each time.

This should make the process of applying for government contracts less daunting, while at the same time affording the transparency which will help to curb nepotism and/or corruption. It should also speed up the process of awarding tenders; hopefully, the establishment of this registry will encourage more SMEs to compete for government business.

It is understandable that late payment is a thorny issue for SMEs, most of which rate other SMEs, as a sector, most likely to settle invoices on time. With restricted capital and high overheads, many SMEs cannot survive, let alone prosper and grow, without reliable cash-flow.

Government’s undertaking to institute a KPI for all government financial officers to make payments within 30 days will be a strong incentive for SMEs to bid for more government business – as long as it is monitored and enforced effectively at all levels by the Treasury.

At the same time, as successful SME owners who do plenty of government work have pointed out, government’s financial officers are also bound by stringent regulations set in place to contain fraud, so by law they cannot make payments for which the paperwork is not in order.

SMEs need to ensure they understand whatever tax certificates, legal compliances or other information are required, and submit them in full along with their invoices, if they want to enable and receive prompt payment.

Government have also halved the tax rate on smaller SMEs, from 6% to 3%. This will make it easier for these businesses to compete with bigger operations for business in both the private and public sector, and with government being by far the country’s biggest spender on procurement, it should also encourage more SMEs to do business with government.

The turnover threshold regarding complex BBBEE compliance process has also been doubled, to R10 million. 75% of the SAICA SME Survey respondents have turnovers of less than R10 million per year, so under the new regulations they are automatically rated at least at BBBEE Level 4, which qualifies them to bid on government tenders. Far from being an onerous battle with red tape, the new BBBEE codes actually make it easier for many smaller SMEs to tender for government business.

Related: Government Funding and Grants for Small Businesses

An area that requires action

There is another concern raised by SMEs that suggest government could, through fairly minor tweaks in policy, make it easier for entrepreneurs to establish SMEs and grow them to the point where they become job creators. 49.9% of those surveyed cited government red tape as a disincentive to starting new companies – these include a wait of three weeks or more to process VAT registration, and similar hurdles involving company registration, tax clearance certificates and other required permits. Some have suggested that government might find the example of Rwanda a useful model in streamlining these processes.

The 2014/15 Global Competitiveness Report by the World Economic Forum (WEF) ranked Rwanda 6th out of 144 countries in terms of ‘burden of government regulation’. The country has achieved this status by attending to areas like the ease of starting a business, obtaining construction permits, registering a property, paying taxes, trading across borders and enforcing payments. It takes six-and-a-half days to register a company in Rwanda, and a day to register for VAT; South African start-up businesses can expect a wait of 46 days and 21 days, respectively, to obtain these essential clearances.

It is hoped that the concerns expressed by SME owners in the research will be considered by government policymakers in their on-going efforts to support and encourage SME growth, and that the information will be valuable in shaping future policy. SAICA has launched the 2016 version of the annual SME Insight Survey as its contribution to the health of the SME sector and thereby to job creation. As Terence Nombembe, CEO of SAICA, said when releasing the 2015 Insight Survey’s findings, “By collecting these insights and investigating the findings, our aim is to influence policymakers in creating a more enabling SME environment – and to demonstrate the ways in which SAICA’s Small and Medium Practices (SMPs) can better assist their SME clients.”

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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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