Benefits, burden and barriers of tax compliance for small businesses
Share this article:
By Mark Frankel
Benjamin Franklin, an iconic American president, famously said. “…in this world, nothing is certain except death and taxes.”
This past year in South Africa, conversation has circled these two topics and painfully so in the context of SMMEs. During Level 5 lockdown, 60% of SMMEs could not operate and this led to the closure of approximately 260,000 small, medium and micro-enterprises by the third quarter of 2020.
For those businesses that survived, they now carry the burden of being the engine of the economy, with SMMEs representing 98% of all businesses, employing more than half of the country’s workforce. Money is tight and handing over that hard-earned cash to the tax man seems unfair but, non-compliance has serious implications for business survival.
Negative impact of non-compliance
Small and medium enterprises are accountable for various taxes such as income tax, capital gains tax, provisional tax, dividends tax, value added tax, employees’ tax, and employment-related levies. To comply, small businesses are required to obtain and complete the prescribed forms. They must also ensure that submissions as well as payments are made on time. Many business owners may not have the resources to comply and lack significant knowledge and skills to meet the tax requirements.
Business owners believe they're saving money by underreporting income in their tax submissions or skipping tax payments entirely. But, what they don't realise is non-compliance with tax laws and submissions can lead to a bad reputation and financial implications for the businesses.
Disadvantages of non-compliance may include:
- Businesses not being able to receive funds in the form of bank loans or funding.
- Many large corporates may not take small business as various suppliers if tax documents are not up to date.
More importantly, small businesses require tax clearance certificates that may help the business to tender for government contracts and enter the supply chains of large corporates. Should there be no compliance, access to funds and markets is restricted.
Outdated financials, poor financial reporting and tax non-compliance were among the reasons funding applications from SMMEs were rejected for the Covid-19 Relief Fund. Consequently, a compliant enterprise is in a prime position to access funding, markets, and networks.
Paying taxes = better business prospects
Tax compliance is an essential business foundation that can increase business profits, exposure to potential investment and overall business growth. The South African government and other relevant institutions have various initiatives in place to help small businesses grow. It is imperative, therefore, that businesses remain tax compliant to be considered for funding opportunities, tax breaks and other support incentives.
To assist local small businesses and their employees through the difficult Covid-19 period, tax relief measures were instituted including the fast-tracking of VAT refunds, a four-month holiday for company skills development levy contributions and a three-month delay for the filing and first payment of carbon tax. This aided cash flow and afforded businesses an opportunity to remain tax compliant.
While measures such as these are a great short-term solution, more has to be done to ensure the longevity of small businesses and assist them with tax compliance. Every business has a responsibility to acquire the knowledge necessary to run a sustainable business. With an understanding of regulations governing the business and compliance requirements along with access to mentors and experts, many of the barriers to tax compliance can be negated.
Empower With Business Management Education
It is increasingly important for SMMEs to have access to educational resources and programs that emphasize the value of compliance. In this regard, the role of business incubator programs like Black Umbrellas is essential.
The best business incubators can shape the prospects for what it means to be a game-changing business, a goal that cannot be achieved with certainty without formalising the business through compliance. What Black Umbrellas does is ensure small businesses receive optimal business development support with business coaches providing training intervention in key areas like taxation. The coaches continually mentor, monitor, assess and evaluate to help businesses reach their full potential.
It is important not only to provide SMMEs with empowering information, but also to facilitate meaningful conversations. Business owners may see tax as a burden but, by discussing their obstacles, their goals, unearthing areas where they lack knowledge and collaborating on solutions, more dynamic and innovative small businesses can survive and thrive.
Mark Frankel is the CEO of Black Umbrellas