The case for more small businesses and less compliance
In South Africa, there are an estimated 2,1 million small businesses versus 6,5 million in the UK and 34 million in the US. That number reduces substantially when you factor in that only 710 000 of those businesses are in the formal economy − legally registered businesses that pay taxes, operate formal bank accounts, etc.
Small businesses represent 99,9% of all businesses in the US and UK. In South Africa, this is estimated at 54%. One final statistic worth noting, given the high unemployment rate in South Africa, is that only 30% of employment is provided by small businesses in South Africa versus 54% in the US and 61% in the UK.
It seems, then, that there is an obvious case for our government to do everything it can to make small business the primary focus and driver of our economy and, by extension, to make it as easy as possible. Our government and industry have done some work to help this: you can now register a business in a day and have a bank account in about as much time. Bizportal even helps you register a domain at the same time. Treasury and SARS also made some attempts with the introduction of the small business tax regime and the turnover tax regime. However, in practice, these regimes exclude most services businesses (67% of the South African economy). They also exclude serial entrepreneurs, despite how small those individual businesses may be.
From the perspective of a CA working with small businesses, one obvious area of high impact is to reduce compliance and, by extension, to make it less expensive to remain compliant. A quick comparison between South Africa and the UK shows some obvious compliance requirement differences − VAT every two months in South Africa versus every three months in the UK. In South Africa, provisional tax estimates twice (and possibly a third time) for every financial year have to be within 90% accuracy to avoid costly penalties and interest. In the UK, provisional taxes are only required for very large businesses (more than £1,5 million annual profit). Not to mention that these taxes have to be paid before year-end in South Africa but can be paid seven months after year-end in the UK. This all contributes to the average cost of compliance for a small business, which by a rough sampling of our firm and its competitors in South Africa and the UK, is higher in South Africa than the UK.
The disparity in small business growth and success between South Africa and countries like the UK and the US underscores a crucial need: reducing compliance burdens to unlock the potential of small businesses in South Africa. Simplifying these processes is more than a regulatory adjustment; it’s a vital step towards economic empowerment and job creation. By doing so we can encourage entrepreneurship, bolster the economy, and pave the way for a prosperous future where small businesses are not just participants, but key drivers of growth. Now is the time to prioritise and empower these engines of innovation and economic resilience
References are available on request.