a three-sector comparative study of the impact of taxation ... · a three-sector comparative study...

A three-sector comparative study of the impact of taxation on small

and medium enterprises

JMP Venter B de Clercq

Department of Taxation Department of Taxation School of Accounting Sciences School of Accounting Sciences University of South Africa University of South Africa

Abstract

In his 2006 State of the Nation Address, President Thabo Mbeki indicated that the

regulatory environment for small businesses would be improved, as this sector plays

an important role in the national strategy for accelerated and shared growth. The aim

of this study is to determine whether the size of an enterprise and the sector in which

the enterprise operates has an impact on how the enterprise’s tax responsibilities are

administered and managed. A survey was conducted amongst small and medium

enterprises in the manufacturing, retail and business services sectors in Gauteng. The

study focused on Gauteng because the majority of small, medium and

microenterprises (SMMEs) are located in this province. The study found that most

small and medium enterprises (SMEs) in the business services sector outsource their

tax responsibilities because they lack the time needed to manage these functions. It

was also found that the size and type of organisation affects the role taxation inputs

play in business decisions. The SMEs included in the survey preferred a reduction in

interest and penalties charged as a taxation relief measure.

Key words

Business servicesManufacturing

Outsourcing

RetailSmall and medium enterprises

Taxation

Tax administrationTaxation relief

1 Introduction

As part of government’s strategy for accelerated and shared growth, the Department of

Trade and Industry (DTI) and the National Treasury are increasingly targeting the small,

medium and microsector of the economy. The measures that have been introduced thus far

Meditari Accountancy Research Vol. 15 No. 1 2007 : 115-135 115

A three-sector comparative study of the impact of taxation on small and medium enterprises

are designed to improve the regulatory environment in which these businesses operate and

to provide appropriate support programmes for these businesses (DTI 2005; Manuel 2006;

Mbeki 2006).

The following reasons have been provided for singling out the SMME sector for support:

the sector provides a means of stimulating economic growth generally;

it is a vehicle for distributing wealth and attaining more equitable growth;

it is a means of addressing rising unemployment, since large corporations’ demand for

labour does not increase in proportion to their growth; and

its role in technical and other innovation is vital for many of the challenges facing South

Africa’s economy (DTI 2005).

There is no doubt that SMMEs play a crucial role in terms of economic development (DTI

2005). It is therefore critical to stimulate growth in this sector by instituting measures, such

as a suitable taxation approach, that create an environment that is conducive to the viability

and prosperity of the sector.

2 Research objectives and importance of the study The objectives of the study were the following:

to determine how the sectors in which an enterprise operates and the size of the

enterprise affect the management and administration of the taxes, duties and/or levies

for which it is responsible;

to compare the value of tax functions and the use of tax advice in business decisions in

SMEs in three different sectors the manufacturing, retail and business services sectors in

Gauteng;

to assess whether the different business enterprises have different use rates for fiscal

benefits and whether the three sectors’ preferences for various tax measures to reduce

the taxation administrative burden differ.

The reasons for conducting tax surveys and selecting the three sectors included in the study

(namely the manufacturing, retail and business services sectors) and for selecting Gauteng

as basis for the study are evident from the background to the study provided in Section 3.

The importance of research on the small business services sector is supported by the

following:

Mr Lionel October, the Deputy Director General of the DTI, presented the

government’s new Small Enterprise Development Strategy at the end of 2005.

According to Mr October’s presentation some of the objectives of the revised strategy

are to create an enabling environment for small enterprises and to ensure sustainable

jobs in the small business sector, to improve the co-ordination of government initiatives

supporting the small business sector and to increase small businesses’ contribution to

the Gross Domestic Product (GDP) (SEDA 2005). This study will contribute to the

evaluation of these govenrmnent objectives.

In the 2005 and 2006 budget reviews, the Minister of Finance announced further

taxation changes to recognise the sector for its prominence in stimulating growth

(National Treasury 2005, National Treasury 2006).

The South African Revenue Service (SARS) has launched a wide-ranging programme

of measures to support small businesses (Deloitte & Touche 2005). This study will


Venter & De Clercq

evaluate some possible future administrative measures that could reduce compliance

costs and could provide a more enabling environment for small businesses.

It is clear from the above that small business tax surveys are important to support the

national accelerated and shared growth strategy and sustainable development. This study

can therefore make a major contribution to an understanding of current and future tax issues

in the SME sector.

3 Background to the study The study focuses on the impact taxation has on the administration and management of

small and medium enterprises in three sectors in Gauteng. In selecting the population to be

used during the survey, three aspects were considered, namely:

the sectors of the economy to be investigated,

the size of the organisations to be surveyed, and

the region to be selected.

The rationale for making each of these selections, namely for choosing the manufacturing,

retail and business services sectors, for selecting SMEs and for focusing on Gauteng, is

discussed below. This section also includes a discussion on the reasons for including

specific taxes in the study.

3.1 Business services, manufacturing and retail sectors

One of the factors considered in determining which sectors of the economy to include in the

survey was the number of corporations involved in each sector. Figure 1 provides a more

detailed overview of corporations registered with the Companies and Intellectual Property

Registration Office (CIPRO) by subsector.

Figure 1 Distribution of registered corporations by industry in 2004

Active Inactive

14.5

23.4

41.2

20.9

18.6

13.6

43

24.8

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Manufacturing Retail Business services Other

Source: Stats SA (2004)



On the basis of the information provided in Figure 1, it is clear that the following three

sectors represent nearly three quarters of the total number of active corporations:

business services;

manufacturing; and

retail.

Figure 2 is based on data contained in the data mining system of the South African Reserve

Bank (SARB) and Statistics South Africa (Stats SA). From the information provided in

Figure 2, it is clear that for the past decade, the annual real growth of the three selected

sectors has outpaced the real GDP growth of the economy as a whole (SARB 2006).

Figure 2 GDP and the selected three sectors’ growth performance (%), from 1994

to 2004

-2

0

2

4

6

8

10

12

1994 1999 2004

Business Services Retail Manufacturing GDP

Source: SARB (2006)

Based on the information provided, it was decided to include the business services,

manufacturing, and retail sectors in the study.

The business services enterprises included in the study included enterprises providing the

following kinds of service: legal services; accounting, bookkeeping and auditing activities;

tax consultancy; marketing research, business and management consultancy; architectural,

engineering and other technical activities; and computer and related activities.

3.2 Small and medium enterprises

According to the National Small Business Act, Act 102 of 1996 (South Africa 1996), a

small business is a separate and distinct business entity, including co-operative enterprises

and non-governmental organisations. It is managed by one owner or more. Including its

branches or subsidiaries, if any, it business is predominantly carried out in a sector or

subsector of the economy. Small businesses in each sector can be classified as micro-, very

small, small or medium enterprises, based on a set of thresholds (South Africa 1996).

The classification criteria for the three sectors previously identified for inclusion in the

study are provided in Table 1. It should, however, be noted that the Standard Industrial

Classification (SIC) differs from the classification used in the previously discussed

databases. Table 1 therefore provides the classification criteria for sectors or subsectors in


Venter & De Clercq

accordance with the SIC included in the survey. An example of the different classifications

is accounting firms that were previously included in business services, but that were now

included in the Community, social and personal services category for purposes of the SIC.

The retail sector of the study included companies classified under the Retail and motor

trade and repair services sector, as well as wholesale trade, commercial agents and allied

services sectors in the SIC database. Similarly the business services sector section of the

study included enterprises from the Finance and business services, and the Community,

social and personal services sectors in the SIC classification database.

The study included medium, small and very small enterprises. As in previous studies in

the SMME sector, the small and very small enterprises were combined for analytical

purposes (see, for example, Tustin et al. 2005; Tustin, De Clercq & Venter 2006). Due to

the disproportionate number of micro-establishments in the selected sectors, especially the

business services (more than 90%), micro-establishments were not included in the study.

Table 1 Classification of micro-, very small, small or medium enterprises

Sector or subsectors in

accordance with theStandard IndustrialClassification (SIC)

Size or class

Total full-timeequivalent of

paid employees

Fewer than:

Total annualturnover

(Rm)

Less than:

Total grossasset value

(fixed propertyexcluded) (Rm)

Less than:

Manufacturing

Medium

Small

Very small

Micro

200

50

20

5

51.00

13.00

5.00

0.20

19.00

5.00

2.00

0.10

Retail and motor tradeand repair services

Medium

Small

Very small

Micro

200

50

20

5

39.00

19.00

4.00

0.20

6.00

3.00

0.60

0.10

Wholesale trade, commercial agents and allied services

Medium

Small

Very small

Micro

200

50

20

5

64.00

32.00

6.00

0.20

10.00

5.00

0.60

0.10

Finance and business services

Medium

Small

Very small

Micro

200

50

20

5

26.00

13.00

3.00

0.20

5.00

3.00

0.50

0.10

Community. social and personal services

Medium

Small

Very small

Micro

200

50

20

5

13.00

6.00

1.00

0.20

6.00

3.00

0.60

0.10

Source: Postma, Dorfling & Van Wyk (2004)

From the three criteria prescribed to categorise businesses as micro-, very small, small or

medium, the number of employees is often the most effective as, with the exception of

agriculture, it can be used for comparisons across all sectors, and information regarding the

number of employees is generally easy to obtain.

Although a more significant indicator of size is annual turnover, it is difficult to gather

this information. In the Stats SA (2004) Integrated Business Register, entities registered

with CIPRO are classified by turnover. These results are provided in Table 2.



Table 2 Size distribution of SA registered corporations, according to turnover,

in 2004

Number %

Micro 212 161 16.4

Very small 170 338 13.2

Small 32 397 2.5

Medium 6 748 0.5

Large 4 596 0.4

Unkown 864 329 67.0

Total 1 290 569 100.0

Source: Stats SA (2004)

It is clear from Table 2 that information on turnover is not readily available, as 67% of

companies are classified as unknown. It is important to note that, although these statistics

exclude firms not registered with CIPRO, for example, sole traders and partnerships, these

enterprises were included in survey. It is estimated that SMMEs represent more than 95%

of the country’s formal business entities (De Clercq, Tustin & Venter 2006:9).

Due to the lack of reliable information relating to turnover, this study, like other studies

in the SMME field, applies employment figures to classify businesses.

3.3 Gauteng region

According to the DTI (2006), Gauteng is the leading province for both formal and informal

businesses. Gauteng accommodates 46.7% of formal SMMEs and 26.9% of informal

SMMEs. KwaZulu-Natal is in second place with 12.6% of formal SMMEs and 25.3% of

informal SMMEs.

SARS maintains a database of the number of business services enterprises registered for

levy payments in terms of the Skills Development Act, Act 97 of 1999 (South Africa 1999),

by employment size and province. The database clearly indicates that most registered

business services employers, namely 54.4%, are based in Gauteng (SARS 2003).

On the basis of the findings regarding the distribution of business activities, it was

decided to select Gauteng as the focus of the study and to limit the survey to the formal

sector.

3.4 Taxes included in the study

According to the 2006 Budget Review, the National Treasury estimates that government

will receive R475 914 million in tax revenue (National Treasury 2006:69). Figure 3, below,

indicates the main sources of tax income for the 2006/07 fiscal year.


Venter & De Clercq

Figure 3 Estimated tax revenue for the 2006/07 fiscal year

30%

23%3%

28%

1%

10%5%

Personal income tax

Company tax

Tax on property

Value Added Tax

Taxes on payroll

Customes and excise

Other

Source: National Treasury (2006)

On the basis of the information provided in Figure 3, it is clear that personal income tax,

taxes on companies and Value Added Tax (VAT) represent 81% of the total tax revenue. A

summary of how each of these three main taxes affect SMEs is provided below.

3.4.1 Personal income tax

Small and medium enterprises can contribute significantly to job creation in South Africa

(Mbeki, 2006). When a business employs people, however, the business becomes an

employer for income tax purposes, and therefore has to comply with the administrative

requirements of the Income Tax Act. The employer must deduct employees’ tax from the

remuneration of each employee (Venter, Hamel & Stiglingh 2006:303). The employer must

complete and submit a monthly return (an EMP201), together with the payment of the

employees’ tax that the business has deducted within seven days of the end of the month

(SARS 2005a). At the end of the year the employer must issue each employee with an

employee’s tax certificate (an IRP5) (Silver & Klein 2005). The business must also submit

an annual reconciliation (an IRP501) to its local SARS branch office within 60 days of the

end of the tax year (Clegg 2004). If an employer fails to meet any of these responsibilities

of an employer, it is liable for penalties and possible interest on late payments.

3.4.2 Income taxes on companies

Income tax on companies has two components, namely normal tax (taxes calculated on the

company’s taxable income for the year of assessment) and secondary tax on companies

(STC) (tax levied on dividends paid).

! Income tax on companies

Every year the Commissioner gives public notice (via the media and Government Gazette)

of the date by which a specific tax year’s tax return must be submitted. If the return cannot

be rendered within the prescribed period, extension must be applied for; or else penalties

for late submission will have to be paid (SARS 2005c).

A taxpayer can qualify for tax deductions for learnership agreements (Warren 2003:23).

However, to receive this benefit, the employer has to complete an IT180 form and attach it

to the tax return for the tax year in which the tax deduction is claimed (Jordaan et al.

2005:207). Similarly, to be able to qualify for the urban development incentive, the



taxpayer must furnish a certificate from the relevant municipality to the effect that the

building is located in a demarcated area (Huxham & Haupt 2006:137).

SMEs that earn an income in excess of R10 000 per annum are provisional taxpayers.

Companies and close corporations are automatically registered as provisional taxpayers by

SARS. Trusts, sole traders and partners of partnerships have to register as provisional

taxpayers within 30 days of becoming liable for the payment of provisional tax (SARS

2005b:10). There are three provisional tax payments that relate to any specific year of

assessment (SARS 2005b:10). The first provisional tax payment must be made within six

months of the commencement of the year of assessment. The second provisional tax

payment must be made no later than the last working day of the current year of assessment

(Mitchell & Mitchell 2004:16). The third provisional tax payment is voluntary and may be

made within six months of the end of the year of assessment just ended, if the year-end is

other than the last day of February. If the year of assessment ends on the last day of

February, the third payment may be made within seven months after year-end (SARS

2005b:10). Payments must be made on the payment advice of the prescribed IRP6 return,

on or before the payment due date reflected on the IRP6 (SARS 2005b:20). Late payments

or submission of returns can result in interest on late payments, penalties for late payment,

additional tax on underpayment and additional tax on failure to submit returns.

The Income Tax Act does contain a number of benefits for a taxpayer that is classified as

a small business corporation, for example, special wear and tear rates (including 100% on

certain manufacturing assets) and lower income tax rates. To qualify as a small business

corporation, a taxpayer must comply with the following requirements in section 12E of the

Income Tax Act 1962 (South Africa 1962):

it must be a company as defined;

the gross income for the year of assessment may not exceed R6 million (from the 2007

year of assessment onward R14 million);

none of the shareholders or members may at any time during the year of assessment of

the company or close corporation hold any shares or have any interest in the equity of

any other company except in limited cases;

not more than 20 per cent of the total of all receipts and accruals (other than those of a

capital nature) and all the capital gains may collectively consist of investment income

and income from the rendering of a personal service; and

it may not be an employment company.

! STC

A tax return must be submitted at the end of each dividend cycle (Huxham & Haupt

2006:242). STC is payable by an SME on the last day of the month following the month in

which the dividend cycle ends. If a company fails to pay the full STC within the relevant

period, interest is payable at the prescribed rate on the outstanding balance, calculated from

the date on which the payment was due (Clegg & Stretch 2005:para 13.7.8). In his 2007

Budget Speech, the Minister of Finance announced that from 1 October 2007 STC will be

replaced with a new withholding tax on shareholders (Manuel 2007).

3.4.3 Value Added Tax

A person with taxable supplies of more than R300 000 (excluding VAT) must register as a vendor for VAT purposes, whilst persons with taxable supplies of more than R20 000 can


Venter & De Clercq

apply for voluntary registration (De Koker & Kruger 2004). After being registered as a vendor, an SME must complete a VAT return (VAT 201) and pay any VAT due to SARS before the 25th of the month following the end of the tax period (SARS 2004). A vendormust furnish a recipient with a tax invoice within 21 days of a request to do so (SARS 2004). If there is a change in the conditions of sale, a debit or credit note should be issued(Brettenny 2005). All documents must comply with the minimum requirements laid downin the Value Added Tax Act, Act 89 of 1991 (South Africa 1991). Late payment or submission of the VAT return could lead to interest and penalties being charged.

4 Research MethodologyThe research methodology applied in constructing a model conducive to meeting the

primary research objectives of the study is explained in this section.

4.1 Sample populationThe sample population consisted of small enterprises (with 21 to 50 employees) andmedium enterprises (with 51 to 200 employees) in the three selected sectors operating inGauteng. Financial managers, general managers, accountants and owners of small andmedium enterprises were targeted as sample elements/respondents.

4.2 Data collection methodology An interviewer-administrated telephonic interview approach was used to collect data fromthe sample of small and medium manufacturing, retail and business services enterprisesoperating in Gauteng. This method was supplemented by a self-administered approach forrespondents who preferred to receive the questionnaire by fax and completing and returningit via the same route.

4.3 Sample The Bureau of Market Research’s (BMR’s) Register of Business Services Establishments(BMR 2004a), its Register of Manufacturers (BMR 2004b) and its Register of Wholesalersand Retailers (BMR 2004c) were used as a sample frame. To ensure that only SMEs thatoperate in the manufacturing, retail or business services sectors in Gauteng would beselected from the sample frame, all foreign elements, for example, large business servicesenterprises (with 200+ employees), were excluded from the database. The sample frame was used to select a sample from each of the three categories included in the study. Table 3shows the sample sizes per manufacturing SME category.

Table 3 Sample size per SME manufacturing category

Initial sample sizeSME Category

N %

Small manufacturing SMEs (20-50 employees) 135 58.7

Medium manufacturing SMEs (51-200 employees) 95 41.3

Total manufacturing SMEs 230 100.0

The proportionate distribution of the sample between small and medium manufacturers wasbased on the size of the total number of manufacturing establishments listed in the BMRdatabase by manufacturing subgroups.

Table 4 shows the sample size for the SME retail subgroups included in the survey.



Table 4 Sample size per SME retail category

Sample sizeSME category

N %

Small retail SMEs (20-50 employees) 180 72

Medium retail SMEs (51-200 employees) 70 28

Total retail SMEs 250 100

The proportionate distribution of the sample between small and medium retailers was based

on the size of the total number of retail establishments listed in the BMR database by retail

subgroup.

Table 5 shows the sample size for the SMME business services subgroups included in

the survey.

Table 5 Sample size per SME business services category

Sample sizeSME category

N %

Small business service SMEs (21-50 employees) 50 62

Medium business service SMEs (51-200 employees) 30 38

Total business service SMEs 80 100

Table 5 reflects a disproportionate distribution of the sample between small and medium

business services enterprises. This approach ensured that at least 30 medium business

services enterprises were included to ensure representation from this segment for analytical

purposes. A systematic stratified sample was used to select the SME samples.

To meet the objectives of the study, an interviewer-administrated paper-based

questionnaire was designed. Questions to meet the objectives of the study were compiled in

consultation with role players such as the National Treasury and SARS. The questionnaire

consisted of 32 questions, including questions to elicit both closed-ended and open-ended

responses. Various data capturing and verification procedures were followed to ensure the

accuracy of the data.

4.4 Validity of the data A total of 379 responses were received, which represents a response rate of 67.7% for the

survey. Sample surveys are subject to error and mainly yield estimates, but no precise

values. Sample error occurs when a sample selected is not perfectly representative of the

population. The formula for the allowable sample error is the following:

z

Ex "#

Where

E = allowable error; and

z = number of standard deviation units that will yield the desired level of confidence

(90% level of confidence).

When one takes the potential sample error into account, it is possible to state a confidence

interval that will probably contain the population parameter. Table 6 below shows the


Venter & De Clercq

interval estimate for the total population based on a 90% level of confidence for the

research variables studied in this survey.

Table 6 Interval estimates for the selected research variables

Sample statistic Interval estimate*

Research variable Value Lower Higher

Handling Skills Development Levy (SDL) internally – Small manufacturing

84.1 75.1 93.1

Burden to comply with tax regulations has increased substantially over past three years – Medium manufacturing

64.5 50.4 78.6

Handling Skills Development Levy internally – Small retail 41.8 35.5 48.3

Burden to comply with tax regulations has increased substantially over past three years – Medium retail

11.9 5.4 18.4

Outsourcing capital gains tax functions – Small business services

33.9 23.8 44.0

Burden to comply with tax regulations has increased substantially over past three years – Medium business services

16.0 4.0 28.0

* 90% level of confidence. Standard error = sp( p)

np "$1

The table shows the interval estimate for the selected variables. On the basis of a 90% level

of confidence, it is clear, for example, that as many as 93.1% and as few as 75.7% of small

manufacturing enterprises deal with SDL functions internally.

5 Analysis and interpretation of research findings This section provides an analysis of the tax survey conducted amongst small and medium

enterprises in the three selected sectors in Gauteng during the period from August 2005 to

January 2006.

5.1 Corpographic profile

Table 7 provides information relating to the respondents per subcategory of SME that

participated in the study.

Table 7 Participants per sample group

Sample frame distribution

Sample respondentsSME category

% n %

Small manufacturing enterprises 59.6 44 58.6

Medium manufacturing enterprises 40.4 31 41.4

Total manufacturing enterprises 100.0 75 100.0

Small retail enterprises 72.0 153 69.5

Medium retail enterprises 28.0 67 30.5

Total retail enterprises 100.0 220 100.0

Small business services enterprises 53.9 59 70.0

Medium business services enterprises 46.1 25 29.7

Total business service enterprises 100.0 84 100.0



Because a proportionate stratified sampling approach was followed in the manufacturing

and retail samples, no data weighting was required to support the statistical analysis, as this

design ensured a self-weighting design. The final response distribution per SME

subcategory was regarded as sufficient to support sound statistical analysis per SME

category. In analysing the information for business services enterprises as presented in

Table 7, it was clear that there is a disproportionate distribution of the respondents across

the SME category. Consequently, for analysis purposes, this required the weighting of the

survey results. The weighting factors used to inflate the survey findings were based on the

size of the business records maintained by the BMR. The BMR database shows a similar

distribution of SME categories as that maintained by SARS (De Clercq et al. 2006:42). The

weighting factors used for business services enterprises were the following:

SME category Weighting factor

Small enterprises 0.54

Medium enterprises 0.46

Figure 4 and Table 8 further profile the participating SME business services enterprises

according to selected characteristics.

Figure 4 Average number of years SME has been in operation

14

27

15

1916

25

0

5

10

15

20

25

30

Small Medium

Years

Manufacturing Retail Business services

Figure 4 shows that the participating SMEs were fairly experienced considering their

average number of years in operation. The mature status of participating SMEs is very

encouraging for collecting objective and reliable data.


Venter & De Clercq

Table 8 Profile of participating SMEs by selected characteristics

Characteristics Small Medium

(i) Average number of full-time staff

- Manufacturing 26 114

- Retail 20 70

- Business services 27 108

(ii) Average number of full-time administrative staff


- Retail 4 10


(iii) Percentage of full-time administrative staff dealing with taxmatters

- Manufacturing 15% 15%

- Retail 49% 45%

- Business services 34% 35%

Based on the information provided in Table 4, it is clear that the percentage of time

administrative employees spent dealing with tax matters depends on the sector in which an

enterprise operates and not on the size of the enterprise.

The survey results support government’s view that the SME sector should be targeted for

future growth. The information indicates that the longer a business is in operation, the

larger it becomes and the more people it can employ. For example, on average, small

businesses that have been in existence for 15 years employ 24 full-time staff members,

while medium businesses that have been operating for 24 years employ an average of 97

full-time staff members. It should therefore be a priority to ensure that as many of the small

enterprises grow to become medium organisations.

For tax purposes, annual turnover is an important criterion in determining whether a

corporation can be classified as a small business corporation. An analysis of the turnover

per category is set out in Table 9.

Table 9 SMEs per sector by turnover*

Manufacturing Retail Services

Turnover % % %

Up to R500 000 8.5 14.9 3.2

>R500 000-R1 million 7.0 8.3 5.7

>R1 million-R2 million 7.0 15.4 4.6




>R15 million 55.0 7.3 28.7

* Excluding refusals

It is evident from the information that the participants in the survey contribute significantly

to economic activity in Gauteng. A further analysis of the turnover per sector indicates that

there is a positive correlation between the number of employees and turnover. This analysis

indicates that government is targeting the correct section of the sectors in terms of small



business corporations. All small enterprises in the business services and retail sectors

qualify as small business corporations in terms of the turnover rule.

5.2 Management of administration of taxes

In order to determine how SMEs in the different sectors manage and administer the

different taxes for which they are liable, the research design model started by establishing

who is responsible for ensuring these SMEs’ tax compliance. Most of the respondents

indicated either that they are responsible for managing and administering the tax function

internally or that they outsource the functions. Due to the complex nature of taxation and

the various administrative requirements, some of the respondents indicated that they

perform routine work relating to certain taxes internally and outsource the more complex

part of the tax functions.

5.2.1 Employees’ tax

As indicated in Section 3.4 of this article, employees’ tax is the main mechanism employed

by government to collect personal income tax. The responsibility of ensuring that this tax is

collected and paid to SARS lies with the employer. Figure 5 indicates the percentage of

enterprises that outsource their responsibility to administer employees’ tax.

Figure 5 Percentage of enterprises that outsource employees’ tax responsibilities

23%

38%

31%

7%

33%

4%

0%

10%

20%

30%

40%

Manufacturing Retial Business Services

Small Medium

Based on the information provided, it is clear that the size of the enterprise has an impact

on whether the employees’ tax function is administered internally – the larger an enterprise,

the greater its capacity to administer this function. This could be due to the fact that larger

enterprises employ more workers and the employees’ tax function is largely a routine task.

An interesting finding from the survey is that medium retail enterprises are more inclined to

outsource their employees’ tax function than medium enterprises in manufacturing or

business services.


Venter & De Clercq

5.2.2 Taxes of companies: Normal income tax

Figure 6 indicates the ratio of SMEs that manage and administer their income tax

responsibilities internally compared to those enterprises that outsource their responsibilities.

Figure 6 Internal/outsource ratio: income tax

18%

51%54%

84%

75%

46%42%

57%

76%71%

40%

28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Internal -Small Outsource -

Small

Internal -

Medium

Outsource -

Medium


It is evident from this figure that the majority of manufacturing enterprises (small and

medium) elect to outsource their responsibility to manage income tax. It is also evident that

the majority of business services enterprises take responsibility for their income tax affairs

internally.

5.2.3 Taxation of companies: STC

The second type of tax that is levied on companies is STC. Of the enterprises included in

the study that are subject to this tax, some outsource the administration of this tax. The

percentage of corporations that elect to outsource this function as compared to those that

elect to perform it internally is presented in Table 10.

Table 10 Outsourcing STC responsibilities*

Small%

Medium%

Percentage of respondents that elect to perform function relating to STC internally


- Retail 41 51


Percentage of respondents that elect to outsource function relating to STC


- Retail 43 39


* Note: not all respondents in the survey were subject to STC, due to the fact that they did not all

declare a dividend and some were not companies as defined.



The results in Table 10 clearly indicate that manufacturing SMEs are more inclined to

outsource their responsibility for STC than enterprises in the other sectors are. It is also

evident that the internal management and administration of the STC function is more

prevalent among larger enterprises.

5.2.4 Value Added Tax

Figure 7 provides an indication of the ratio of enterprises that perform VAT functions

internally compared to those that outsource this function.

Figure 7: Internal/outsource ratio: Value Added Tax

0% 20% 40% 60% 80% 100%

Manufacturing - small

Manufacturing - medium

Retail - small

Retail - medium

Bus. services - small

Bus. services - medium

Internal Outsource

It is apparent from Figure 7 that the size of an enterprise has a direct impact on its ability to

administer and manage the VAT function internally. However, it is interesting to note that

just over 40% of both the small and medium retail enterprises outsource their VAT

functions.

5.2.5 Reasons for outsourcing

To enable a greater understanding of why SMEs outsource tax functions and

responsibilities, the respondents were asked to identify the main reasons for doing so, if

they did opt to do so. The main reasons for outsourcing are set out in Table 11.

Table 11 Reasons for outsourcing tax functions

Manufac-turingSmall

Manufac-turing

Medium

RetailSmall

RetailMedium

Businessservices

Small

BusinessservicesMedium

Reason for outsourcing

% % % % % %

Unskilled tax staff 65.0 48.4 30.0 16.4 53.1 60.0

Cheaper to outsource 9.1 6.5 26.8 19.4 33.3 14.3

Time factor 54.5 22.6 32.7 22.4 56.3 75.0


Venter & De Clercq

The SME respondents indicated that a lack of time is one of the main reasons, across the

different sectors, for outsourcing tax functions. A large proportion of SMEs also indicated

that they outsource due to a lack of skilled tax staff, which indicates a need for tax training

in order to deal more effectively with tax functions and responsibilities internally.

5.3 Role of tax functions in the management of the business

The research model was designed to establish the value of tax inputs/advice/information to

SMEs in business planning and management. It is clear from the analysis presented in

Table 12 (below) that small and medium enterprises hardly use tax

inputs/advice/information for management and planning purposes. This suggests that SMEs

either do not have the required skills to utilise tax inputs as a strategic management tool, or

that they do not see the potential advantages of an effective tax information system in

support of business planning and strategising.

Table 12 Value of tax inputs/advice/information

Small%

Medium%

Tax functions are only performed because they are compulsory

- Manufacturing 70.5 64.5

- Retail 43.8 31.3

- Business services 30.5 24.0

Inputs from tax staff/division/consultants are used for short-term tactical business planning


- Retail 7.8 13.4


Inputs from tax staff/division/consultants are used for long-term strategicplanning


- Retail 9.8 32.8


5.4 Preferences for tax relief measures

There are various incentives to support and promote growth of the SME sector. These

incentives range from government grants made by the DTI, for example, the Small,

Medium Enterprise Development Programme (SMEDP), the Critical Infrastructure

Programme (CIP) and the Skills Support Programme (SSP) (Deloitte & Touche 2005:87).

There are also a number of fiscal incentives for SMEs, for example, Small Business

Corporations legislation, special allowances for manufacturing enterprises, roll-over relief

for capital gains tax and capital gains tax exclusion for the disposal of small business

assets; and small business corporation vendors qualify as Category F vendors (Deloitte &

Touche 2005:87). Respondents were asked to indicate whether or not they have ever made

use of any of the following incentives. The findings are presented in Table 13.



Table 13 Utilisation of different incentives

Manufac-turingSmall

Manufac-turing

Medium

RetailSmall

RetailMedium

Businessservices

Small

BusinessservicesMediumIncentives

% % % % % %

Government grants 18.2 19.4 7.8 9.0 6.8 8.0

Learnershipincentives 20.5 22.6 7.2 7.5 27.1 36.0

Tax rates for smallbusiness corporations 31.8 6.5 12.4 14.9 27.1 24.0

Many SMEs clearly do not use the support programmes available to them. Further

investigation indicated that one of the main reasons for the lack of use of the different

incentives available is that SMEs are not aware of the different incentives. The

requirements and process to apply for the incentives might also be a limiting factor.

The research model was also designed to determine which of a range of possible options

to reduce tax compliance burdens SMEs would prefer. A preference index was compiled to

assess the preferences for the various tax measures presented to the SMEs. This index was

compiled by allotting multiplicator values to each of the rating options presented to the

SMEs. The multiplicator values allotted to each of the rating options were as follows: not

preferred = 0; preferred = 50; and highly preferred = 100.

Figure 8 Preference index for tax measures for small enterprises

26

64

43

66

7772

92

82 81 82 79 79

96

77 78

0

10

20

30

40

50

60

70

80

90

100

Fewer VAT

returns

Resolve disputes

between SMEs &

SARS

Reduced

penalties/interest

SARS ‘help desk' Reduced tax rates

for SMEs



Venter & De Clercq

The first choice for small manufacturing enterprises was a reduction in tax rates. Both small

retail and business service enterprises’ preferred choice was a reduction in penalties and

interest rather than a reduction in tax rates.

Figure 9 Preference index for tax measures for medium enterprises

24

64

28

65

78 7781

84 82 82

70

80 82 81

66

0

10

20

30

40

50

60

70

80

90

Fewer VAT returns Resolve disputes

between SMEs &

SARS

Reduced

penalties/interest

SARS ‘help desk' Reduced tax rates for

SMEs


The first preference for SMEs in all three sectors is a reduction in penalties and interest,

followed by a desire for a SARS helpdesk to provide information on taxes and a reduction

in the tax burden on SMEs.

6 Conclusion The SME sector continues to play an important economic role in the creation of wealth and

job opportunities, thereby making a valuable contribution to the accelerated and shared

growth strategy. The study found that the size of an enterprise and the sector within which

an SME operates affects which tax functions are outsourced.

Generally, tax matters are not considered an important input for making business

decisions or for planning for the future of enterprises. The study provides South African

regulators with insight into the effect of taxation on SMEs and into how SMEs attempt to

manage their tax risks. The study has also identified areas which should be investigated

further to provide appropriate tax and tax administration relief for SMEs. So, for example

the study found that SMEs across the three sectors prefer a reduction in penalties and

interest rather than a reduction in the tax rate.

From the study it is also clear that very little money is spent on tax skills development in

enterprises. It can therefore be argued that the development of tax skills can help to SMEs

to reduce outsourcing costs and promote their long-term survival.



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