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Stimulating The SME Sector: What Can Government Do Differently?

A number of SME surveys and reports have identified key barriers to entrepreneurs wanting to start new SMEs or expand their existing businesses. In several instances, changes in policy by government could reduce these barriers significantly, in others they have already taken action.

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The South African Institute of Chartered Accountants (SAICA) commissions an annual Small and Medium Enterprises (SME) Insights Survey with several objectives: To canvass SMEs’ opinions and perceptions, to help SAICA members in small and medium practices (SMPs) to understand ways to better serve the small business community, and to assemble data that will be of use to government policymakers in their quest to enable SMEs as the primary driver of job creation, as outlined in the National Development Plan (NDP).

More than 1 300 small and medium enterprises (SMEs) were canvassed in the 2015 survey, a significant increase on the 800 respondents who participated in 2014. SAICA are calling for SMEs to participate in the 2016 survey and to keep the pressure up on law makers. The link to the 2016 survey is: SMME Survey 2016.

One of the findings in the 2015 survey report indicates that if government wants to achieve NDP targets of 10 million new jobs, with the SME sector responsible for 90% of new employment by 2030, it should be prepared to accept that some things have to be done differently.

The survey results show unequivocally that the SMEs that have been in business the longest generally have the highest turnover, and employ the most people. So although the creation of new SMEs is very important, it is equally important to acknowledge that meaningful job creation only begins when SMEs are achieving annual turnover of R2-million or more.

Related: How SMEs Can Defeat The Red-Tape Bugbear

Given that over 60% of SME start-ups fail within two years, and only 20% achieve long-term stability, the research findings suggest a two-pronged approach by government may be required: To encourage more SME start-ups and to provide them with strong financial access and technical support, and actively to encourage growth in established SMEs that have survived the critical first few years.

Longevity vs turnover for SMMEs

Longevity vs employment in SMMEs

Top reasons for SME failure

Asked what they saw as the main factors behind the failure of SMEs, the survey respondents’ three top factors are revealing: Their debtors pay them late, they are not good at managing cash flow and they do business with clients who don’t pay them.

From all three top responses, it is clear that unreliable cash flow is one of the primary reasons why businesses fail. In a July 2015 report on levels of optimism among South African SMEs, the CFO of specialist SME lender Business Partners, Ben Bierman, said: ‘Cash flow is a constant challenge for SMEs, and late payments or non-payment is one of the largest risk factors impacting a small business’ sustainability.

‘Late payment can be disastrous for an SME’s cash flow – as they are unable to absorb these payment delays as effectively as larger companies do – and can potentially lead to the failure of an otherwise sound company.’

The perception that government at all levels pays late is unsurprisingly then, one of the major reasons why 72% of the survey sample does no business with government at all.

If government is to support and develop SMEs – particularly those that achieve B-BBEE compliance and are majority or wholly black-owned – by channelling its procurement spending to qualifying SMEs, it needs to create a culture of swift payment by government at national, provincial, municipal and parastatal level.

The KPI announced by former Finance Minister Nhlanhla Nene in the 2015 Budget, which will oblige financial officers at all levels of government to ensure payment for services to SMEs within 30 days, could go a long way to removing this obstacle to SME development – as long as it is properly implemented, monitored and enforced by the Treasury.

The fourth factor named as a reason for SME failure in the 2015 SME Insights Survey is that they start with less capital than they need.

Related: Making Government Business More Attractive To SMEs

Combined with cash flow instability, insufficient start-up capital can quickly prove fatal to SMEs. Although government does provide a substantial amount of finance and support for start-ups through entities such as SEFA, the Department of Trade and Industry and the Black Business Supplier Development Programme, another survey by online payroll and accounting provider Sage earlier in 2015 revealed that 96% of South African start-ups receive no assistance, financial or otherwise, from government.

The problem appears to be mainly a lack of awareness of the available government and private sector funding, so a proactive step would be for government and big business to collaborate on educating more SMEs on their capital funding options.

As Ivan Epstein, President for Sage International and Chairman of Sage Foundation said: ‘One of the biggest barriers to the success of SMEs in South Africa is education. It would be a wonderful, positive opportunity to work with government to help SMEs face challenges like regulatory compliance, access to finance, skills development and mentoring.’

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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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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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