Davis Tax Committee on tax in the SME sector

[Mike C]

I believe they should not worry about these definitions and sizes - we should go back to a simple solution where all businesses pay a a fixed percentage of their turnover - say 5% (suck a small number) , on a monthly basis.

I can't really go with the idea of taxing turnover, as some businesses have large turnover with smaller profit. I do, however, support the idea of simplifying things. If it gets too complicated (as is the want of bureaucracy) then confusion reigns.

I suppose the difficulty of using profit as a gauge is that it can be manipulated by director's drawings and other expenses.

It think a small business could be defined as a business which has 10 or less employees (numbers can be changed) and an annual profit of less than say R500,000.

[Justloadit]

Cannot look at profit alone, as the numbers can be changed by members drawings/income.

A one man show can churn R3million in a month with out much sweat, but his profit may be 0.25% of the turn over. You say huh, well look at prepaid services, such as airtime and electricity, this is all web driven except for the verification of incoming deposits, and the purchasing of replenishment stock. We make mark ups of 0.25% on the sale, and make our money on turning it as many times as 22 times a month, but looking at turn over, we are compared to a a company that does R36million a year, who have 50 plus staff.

A better way of looking at a company size is maybe extracting the amount o f VAT the company pays, this will give a pretty good indication of the company's health, irrespective of turnover figures.

There is another curve to this ball of looking at VAT only, what about the companies that export? they may land up claiming VAT rather than paying VAT, since export orders are zero VAT rated. What is important is that these non VAT values must be completed ion the VAT form, as SARS does verify when you start claiming or paying very little VAT.

[Dave A]

A better way of looking at a company size is maybe extracting the amount o f VAT the company pays, this will give a pretty good indication of the company's health, irrespective of turnover figures.

There was a proposal along those lines when we were thrashing the BBBEE thresholds for EME's and QSE's. The problem is, as you point out, it's fiddly and there's the potential for some manipulation; probably more unreliable than turnover as an indicator if you combine turnover with the business sector to get an idea of size.

Factor in the goal to create employment, then you want to reward sectors which need high employment levels to hit the threshold more than those that can do it with low employment levels - which ultimately means going the turnover route to set thresholds for preferential tax treatment makes more sense.

I do sympathise with your frustration over it, but the upside for you is you have far less employee issues to deal with, which in SA with the way the labour environment is at the moment, is a fairly considerable "benefit" not to be sneezed at

What I really have a gripe with, besides red tape (but in truth that effects non sbc's as much) is that any prudent businessman, if he owns the property from which he operates, will house the property in a property owning company, at the least. That of course immediately disqualifies his operating company from being an sbc. So this simple act potentially costs him R94k per year. It may not be the intention of the act, but it certainly is the consequence.

Great to see someone else sees this as an issue. This was going to be my next "point of interest", although looking at the issue from a different angle.

My angle on this is:
The SBC turnover threshold is R35 million per annum, if I remember correctly. (I'm sure I can rely on someone correcting me if I'm out of date on that).
And realistically most small businesses do significantly less than that - certainly in any of the service industries, which is the sector most likely to give you the best employment creation bang for your buck. In fact the vast majority* are micro-enterprises (turnover of less than R5 million per annum).
The service industries are also a fertile breeding ground for new start-ups. True, many fail, but we're playing a numbers game here and trying to push the odds in the direction we want, right?

Now when someone is successful in one small or micro venture, the odds of them successfully launching another micro or small biz is fairly good. Arguably better than the ambitious techie with no business experience, and often better than the successful micro entrepreneur trying to push on to significantly higher levels beyond their current business acumen / expertise in their existing business (the business acumen needed at each level is significantly different, and quite often proves to be a fatal step up if charged at too quickly).

And based on my experience, that next venture if in a new industry will typically be a partnership - combining tech expertise in one partner with proven business acumen in the other...

I don't know if that makes the point well enough. Perhaps I need to give more thought on how to present a cohesive, structured argument that brings a number of factors together. I might come back to this on another day(but I'll leave what I've put down so far in case I don't).

The upshot of it all though is - Why inhibit this potential SMME breeding ground with such a stiff penalty? There must be a way of rule making that can leverage that micro or small business acumen in a win/win way. As long as the total turnover of the companies with common shareholding doesn't exceed the threshold - something like that.

I'm open to suggestions - I just recognise we're missing an opportunity here.

*Perhaps not by share of the market based on turnover, but certainly by number of enterprises.