An economic report published by Sage reveals that South African micro-businesses spend around 20 times more of their available hours on tax-related accounting than medium-sized companies, and around four times more of their available hours than small companies.
This new global research highlights the impact of unfair and inefficient tax systems on Small & Medium Businesses around the world, including findings to suggest that the smallest 515,000 companies and startups registered in South Africa face some of the most significant administrative burdens. Undertaken by Plum Consulting, the research analyses the impact of direct and indirect costs of tax on Small & Medium Businesses, based on a survey of over 3,000 companies across 11 global markets.
The report “A Taxing Problem: the impact of tax on small businesses” found that micro-businesses spend just under nine days per year in total on tax-related accounting, amounting to more than 2% of their working time spent on tax admin. On a more positive note, South African micro-businesses (less than five employees) are paying the lowest proportion of their taxes relative to profits compared to their larger counterparts among countries in the survey.
South Africa and Ireland are the only countries where micro-businesses pay a lower proportion of their profits in tax than both Small & Medium Businesses. In South Africa, micro-businesses pay tax representing around 9% of profits, compared to around 23% for Small & Medium Businesses. In most countries, micro-businesses pay more than 20% of profits in tax, with Brazil’s micro-businesses paying the highest proportion of their profits in tax at 65%.
The average South African company spends just over 20-man days a year on tax-related accounting, or more than 1% of total man hours. This compares favourably to the US (over 4%), Germany (around 3.7%), and Spain (more than 2.5%), but lags the performance of best-practice markets such as the UK and Singapore (both around 0.5%). Reducing man-hours lost to accounting could free time for South African businesses to spend on productive activities that add value to the economy.
“Small & Medium Businesses make a significant contribution to the South African economy, making up 97% of all businesses, employing 70% of the total labour force, and paying 32.2% of corporate tax. The success of these businesses is crucial to growth, job creation and the provision of tax revenues to fund public services,” says Pieter Bensch, Executive Vice-President, Africa & Middle East at Sage.
“It is important to help drive their productivity and growth by recognising the numerous issues they face as result of their size. Limited resources and large payments such as annual tax bills contribute to cashflow problems and operational inefficiencies, in addition to the unproductive hours these businesses log every year dealing with administrative burdens.”
The failure rate of start-ups and small businesses in South Africa is one of the highest in the world, he adds. “Lack of finance, compliance burdens, infrastructure challenges, and late payments all play their part in this picture. A progressive tax regime and further streamlining of tax regulation could help improve their survival rates.”