VAT falling on small business

vat 1Author: Keith Engel (Moneyweb).

Government needs to understand importance of not disrupting cash-flow.

The South African government has consistently expressed its support for small business. This support includes tax incentives. However, the point consistently missed is the critical need for the government not to disrupt cash-flow, which is far more important than any of the so-called tax incentives to date.

Most small businesses are involved in the service sector with human services being the key value-add.  Companies of this nature often make small-margins and must pay their employees monthly (or even weekly) to maintain business activity. Third-party inputs (e.g. small product purchases and third-party services) must also be paid within tight time-frames (e.g. at point of purchase or within 30 days).

On the other hand, receipts are often delayed due to the lack of economic power.  Small businesses simply lack the resources and the uniqueness of product to enforce prompt payment, especially when dealing with organisations larger than themselves.  It is not unknown for the South African government and its public entities to make payment from six months to a year after small business services are performed.  Larger companies typically pay small business last in queue with payments being delayed as much as 90 days. Even transactions between small businesses can be problematic if the small business client delays payments due to cash-flow difficulties.

It is against this background that the longstanding VAT invoice method for small business companies is so problematic. Under the bi-monthly system, VAT will often become due to SARS even though cash receipts are delayed or lacking.  The net result is an inevitable cash short-fall.  The small business owner is then left with three difficult choices:

  • delay payment to employees and watch their business disintegrate;
  • delay payment to SARS at significant cost (e.g. penalties, interest and administrative hassle); or
  • obtain expensive short-term bridge financing from lender subject to high-interest charges.

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