GARY MOORE: SME tax proposal is bound to fail

In May the small business development ministry published a notice in the Government Gazette inviting public comment on a draft Small Enterprise Development Masterplan. The period for comment on the draft has now closed.

According to the notice, minister Stella Ndabeni-Abrahams intends publishing the master plan in the gazette in terms of the 1996 National Small Enterprise Act, as a strategy or policy to support and develop the sector.

That Act defines a “small enterprise” as an owner-managed business entity carried on in any of 11 economic sectors, and having such number of employees and annual turnover as categorise it as a micro, small or medium enterprise in its sector.

Oddly, rather than focusing on how to support or develop small enterprises, the draft master plan fixates on how to entice them to register as taxpayers, and thereby to become “formal”.

The master plan speaks of “incentivising” compliance by informal SMMEs with tax and employment administration. It is of the view that participation in the “formal economy” means being “registered for tax”, and that providing “formal employment” means “filing an IRP5 form” (employee’s tax certificate), but does not wish to “force” formalisation.

For the small business development minister to attempt to coax small businesses to comply with tax laws is futile, unnecessary and beyond her powers. Let’s start with why it is futile to attempt to coax small businesses to comply with tax laws.

First, the master plan says consideration should be given for new approaches to enable registration that acknowledges enterprising activities of self-employed people and sole-proprietor enterprises.

The master plan recommends setting up a mechanism where sole traders and self-employed entrepreneurs can register their activities or enterprises with the Companies & Intellectual Property Commission (CIPC), not to form a company but merely as a “registration of trading in the chosen industry”.

With the greatest respect, it is naive to imagine, as the minister appears to, that unregistered small entrepreneurs and partnerships will flock to register with the CIPC. Indeed, the master plan acknowledges that informal economy actors may justifiably perceive the department’s proposed registration system as a means to coerce them to pay taxes, and may consequently not take up the department’s invitation to register.

If it comes to the SA Revenue Service’s (Sars’) attention that a small enterprise has registered as proposed by the master plan but is not registered for tax, it can register that small enterprise for tax.

The Tax Administration Act provides that where a person who is obliged to register with Sars under a tax Act fails to do so, Sars may register the person for one or more tax types as is appropriate under the circumstances.

The only encouragements that would tempt the unregistered to register are financial incentives that are seen by SMMEs as being at least equal to the likely tax and other burdens and disadvantages that registering with the authorities would attract.

Second, attempting to coax small businesses to comply with tax laws is unnecessary. It is unnecessary to introduce new measures to require the registration of sole-proprietor enterprises. Tax laws already require unincorporated sole traders to register.

The SA Revenue Service Act states that an objective of Sars is the effective collection of tax revenues and that to achieve this objective Sars must secure the widest possible enforcement of the tax laws, which include the Income Tax Act and the Unemployment Insurance Contributions Act.

Under the Income Tax Act, the Sars commissioner must annually give notice of the persons who are required to furnish income tax returns. The commissioner’s annual notices have been requiring every natural person who during the year of assessment “carried on any trade” to submit a return.

This means every natural person who carried on any trade, regardless of his or her turnover, must submit an income tax return. The Income Tax Act requires every person who becomes liable to submit a return to be registered as a taxpayer.

The master plan aims at greater “employment administrative compliance”. But employment legislation already requires all small employers to register. The Unemployment Insurance Contributions Act requires an “employer” (namely “any person” who is liable to pay to any person any salary, wage or other remuneration) to apply for registration to the Sars commissioner.

Finally, attempting to coax small businesses to comply with tax laws is beyond the powers of the small business development minister. The National Small Enterprise Act defines the small business support strategy as the policy in respect of small enterprise support as gazetted by the minister, and includes the policy stated in the White Paper on National Strategy for the Development & Promotion of Small Business gazetted in 1995.

This means the small business development minister can only gazette a policy (or strategy, or master plan, call it what you will) for the “support”, “development” or “promotion” of small enterprise.

A policy that urges small enterprises to register as taxpayers is not a policy for the support, development or promotion of small enterprise, and cannot properly be described as one.

• Moore, a practising attorney in Johannesburg for 30 years, is a senior consultant at the Free Market Foundation. He writes in his personal capacity. This is the first article in a three-part series.