The tax compliance burden for small and medium enterprises

Small and medium enterprises (SMEs) have long been, and continue to be recognised, as a priority sector for growth and development in South Africa as it plays a critical role in our country’s economic growth and employment creation engine.  

Over the years, South Africa has achieved steady successes in broadening its tax base amongst small businesses and various legislative measures were enacted to provide preferential tax treatment to these small businesses. 

In the South African 2023 Tax Statistics Report, an annual report issued jointly by National Treasury and the South African Revenue Service (SARS) which was published in December 2023, it is noted that as at 30 September 2023, of the approximately 1.06 million companies assessed for the 2021 tax year, 159 307 were small business corporations (SBCs) who paid tax at the preferential graduated income tax rate (instead of the fixed corporate tax rate of 27%).  

SARS also continues to share relevant information with SMEs pertaining to their tax compliance matters via dedicated SARS newsletters. 

Despite the significant progress made, the regulatory burden and the cost of tax compliance remain a significant challenge for SMEs as they often do not have the necessary staff resources and skills to navigate the complex tax rules to comply with all their tax obligations timeously and fully. The cost of tax compliance can thus add significantly to the cost of doing business for SMEs (e.g., additional resources that have to be employed to comply with tax rules, significant penalties imposed for non-compliance with tax rules, administrative non-compliance penalties imposed for outstanding tax returns, among other costs).   

Given the importance of this sector to the South African economy, it remains imperative that government continues to reduce the tax compliance burden for SMEs, provide tax incentives that benefit the SME sector (such as the turnover tax regime), simplify the tax laws affecting SMEs and provide support for these business to avail themselves of the Voluntary Disclosure Programme to regulate their tax affairs with SARS, where relevant.  

As many of these small businesses operate within the informal sector, incentives and regulatory changes are critical to ensure the transition from the informal sector to the formal sector.