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Preferential Procurement is Set to Reinforce BBBEE Codes

New legislation effective 7 December will change the BBEEE landscape.

Deon Oberholzer

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Legislation is like a rowboat. The boat is provided for you to get to the other side, but you have to row it in the right direction in order to get there. This is the thinking behind the new regulations on Preferential Procurement that come into effect on 7 December 2011. For the supplier, the rowboat is the means to securing a contract; for government the rowboat will facilitate the equitable spread of economic empowerment.

The loopholes that have allowed the prevalence of fronting and the enrichment of individuals at the expense of wider capacity building and skills transfer have been a worrying factor for the architects of Black Economic Empowerment (BEE). Many are asking the question: after 17 years of BEE, where are the black industrialists?

President Zuma asked this question at the Black Business Summit in September 2011. “The economy must produce authentic black entrepreneurs, who own factories and manufacture textiles, furniture, metal products or whatever the market requires,” he said.

The answer to this concern may well be provided by the new Preferential Procurement regulations which aim at closing the door to fronting and black intermediaries that act as order mail boxes. The intention is to encourage black suppliers to develop their own capacity to deliver while recognising companies that engage in real transformation. Both the weighting of procurement points and the new restraints on outsourcing should result in a more equitable outcome.

Evaluation of points

Come December, tenders must first be evaluated on functionality, with scores allocated for each candidate’s capacity to meet the terms of reference. These may include criteria stipulated by National Treasury or the relevant government body to meet certain transformational objectives.

Applicants who meet the minimum criteria for functionality must then be evaluated on price and Broad-Based Black Economic Empowerment (BBBEE) status, according to an 80/20 or 90/10 formula. So the message is; your tender application must first meet all the technical criteria, second it must be competitively priced and third, you should have a high BBBEE rating.

For contract values under R1 million, the 80/20 weighting applies. This means that 80 points are allocated for the price and the balance of twenty points are allocated for BBBEE rating, with L1 scoring the full 20 points and lower ratings scoring a sliding scale of lower points – 18, 16, 12 and 8 points scored for L2, L3, L4, L5 respectively, and so on.  This weighting gives proportionately greater favour to the BBBEE status of the applicants, making it a little easier for small black suppliers to compete.

The balance shifts to 90/10 for contract values above R1 million, which places greater pressure on applications for multi-million rand contracts to be competitively priced. 90 points are allocated to price, while a maximum of 10 points count towards BBBEE status, with L1 scoring the full 10 points, followed by 9, 8, 5 and 4 points for L2, L3, L4 and L5 respectively down to non-compliant bids that get zero.

In both cases, the contract must be awarded to the tenderer who scores the highest number of points out of 100. If this does not happen, the other candidates may challenge the procurement decision.

A high BBBEE rating could be a tangible benefit for companies that want to charge a bit more for a project. In other words, a L1 or L2 candidate may still win on points even if his price is higher than that of his competitors. This is certainly an incentive for companies to clear the Level 3 barrier and get into the top end of the tender evaluation.

Conditions of outsourcing

One significant condition is that contracts can no longer be awarded to black intermediaries who then simply pass on the actual work to a non-compliant company. If the tenderer intends sub-contracting more than 25% of the value of the contract to any other enterprise, that sub-contractor must have a BBBEE status equal to or greater than that of the tenderer, or the work must go to an exempt micro enterprise (EME); otherwise the BBBEE points of the tenderer will not be counted in the total score. This should also put a lid on corrupt tendering practices and encourage the development of capacity within black-owned companies.

A second significant condition is the Local Content Clause: the contractor may not renege on contract terms that stipulate a minimum threshold of local production and local content. This means, for example, that you cannot, after being awarded a contract, decide to source cheaper materials from the east rather than use local materials; you are obliged to meet the contract requirements for local manufacture and services. Government has already started to identify designated sectors, such as the automotive industry, where local content rules will be applied diligently.

If you are found to be in breach of these conditions, the penalties may be disqualification, having to pay for costs and damages incurred, cancellation of the contract, being barred from doing business with government (any organ of state) for ten years, or criminal prosecution.

When the Preferential Procurement regulations come into force the result will be a more level playing field for tender applications and an emphasis on using compliant suppliers who can do the work themselves. Regulations are always onerous, but these are designed to drive transformation more effectively, opening the way for real participation of black and BEE compliant suppliers in the economy.

Deon Oberholzer is the co-founder and CEO of Veri-Com, a SANAS Accredited BEE Verification Agency. He has been involved with Black Economic Empowerment at various levels since 2004.

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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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Entrepreneur Today

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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