A three-sector comparative study of the impact of taxation on small and medium enterprises

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1 A three-sector comparative study of the impact of taxation on small and medium enterprises JMP Venter Department of Taxation School of Accounting Sciences University of South Africa B de Clercq Department of Taxation School of Accounting Sciences University of South Africa Abstract In his 2006 State of the Nation Address, President Thabo Mbeki indicated that the regulatory environment for small businesses would be improved, as this sector plays an important role in the national strategy for accelerated and shared growth. The aim of this study is to determine whether the size of an enterprise and the sector in which the enterprise operates has an impact on how the enterprise s tax responsibilities are administered and managed. A survey was conducted amongst small and medium enterprises in the manufacturing, retail and business services sectors in Gauteng. The study focused on Gauteng because the majority of small, medium and microenterprises (SMMEs) are located in this province. The study found that most small and medium enterprises (SMEs) in the business services sector outsource their tax responsibilities because they lack the time needed to manage these functions. It was also found that the size and type of organisation affects the role taxation inputs play in business decisions. The SMEs included in the survey preferred a reduction in interest and penalties charged as a taxation relief measure. Key words Business services Manufacturing Outsourcing Retail and medium enterprises Taxation Tax administration Taxation relief 1 Introduction As part of government s strategy for accelerated and shared growth, the Department of Trade and Industry (DTI) and the National Treasury are increasingly targeting the small, medium and microsector of the economy. The measures that have been introduced thus far Meditari Accountancy Research Vol. 15 No :

2 A three-sector comparative study of the impact of taxation on small and medium enterprises are designed to improve the regulatory environment in which these businesses operate and to provide appropriate support programmes for these businesses (DTI 2005; Manuel 2006; Mbeki 2006). The following reasons have been provided for singling out the SMME sector for support: the sector provides a means of stimulating economic growth generally; it is a vehicle for distributing wealth and attaining more equitable growth; it is a means of addressing rising unemployment, since large corporations demand for labour does not increase in proportion to their growth; and its role in technical and other innovation is vital for many of the challenges facing South Africa s economy (DTI 2005). There is no doubt that SMMEs play a crucial role in terms of economic development (DTI 2005). It is therefore critical to stimulate growth in this sector by instituting measures, such as a suitable taxation approach, that create an environment that is conducive to the viability and prosperity of the sector. 2 Research objectives and importance of the study The objectives of the study were the following: to determine how the sectors in which an enterprise operates and the size of the enterprise affect the management and administration of the taxes, duties and/or levies for which it is responsible; to compare the value of tax functions and the use of tax advice in business decisions in SMEs in three different sectors the manufacturing, retail and business services sectors in Gauteng; to assess whether the different business enterprises have different use rates for fiscal benefits and whether the three sectors preferences for various tax measures to reduce the taxation administrative burden differ. The reasons for conducting tax surveys and selecting the three sectors included in the study (namely the manufacturing, retail and business services sectors) and for selecting Gauteng as basis for the study are evident from the background to the study provided in Section 3. The importance of research on the small business services sector is supported by the following: Mr Lionel October, the Deputy Director General of the DTI, presented the government s new Enterprise Development Strategy at the end of According to Mr October s presentation some of the objectives of the revised strategy are to create an enabling environment for small enterprises and to ensure sustainable jobs in the small business sector, to improve the co-ordination of government initiatives supporting the small business sector and to increase small businesses contribution to the Gross Domestic Product (GDP) (SEDA 2005). This study will contribute to the evaluation of these govenrmnent objectives. In the 2005 and 2006 budget reviews, the Minister of Finance announced further taxation changes to recognise the sector for its prominence in stimulating growth (National Treasury 2005, National Treasury 2006). The South African Revenue Service (SARS) has launched a wide-ranging programme of measures to support small businesses (Deloitte & Touche 2005). This study will 116 Meditari Accountancy Research Vol. 15 No :

3 Venter & De Clercq evaluate some possible future administrative measures that could reduce compliance costs and could provide a more enabling environment for small businesses. It is clear from the above that small business tax surveys are important to support the national accelerated and shared growth strategy and sustainable development. This study can therefore make a major contribution to an understanding of current and future tax issues in the SME sector. 3 Background to the study The study focuses on the impact taxation has on the administration and management of small and medium enterprises in three sectors in Gauteng. In selecting the population to be used during the survey, three aspects were considered, namely: the sectors of the economy to be investigated, the size of the organisations to be surveyed, and the region to be selected. The rationale for making each of these selections, namely for choosing the manufacturing, retail and business services sectors, for selecting SMEs and for focusing on Gauteng, is discussed below. This section also includes a discussion on the reasons for including specific taxes in the study. 3.1 Business services, manufacturing and retail sectors One of the factors considered in determining which sectors of the economy to include in the survey was the number of corporations involved in each sector. Figure 1 provides a more detailed overview of corporations registered with the Companies and Intellectual Property Registration Office (CIPRO) by subsector. Figure 1 Distribution of registered corporations by industry in % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Active Inactive Source: Stats SA (2004) Manufacturing Retail Business services Other Meditari Accountancy Research Vol. 15 No :

4 A three-sector comparative study of the impact of taxation on small and medium enterprises On the basis of the information provided in Figure 1, it is clear that the following three sectors represent nearly three quarters of the total number of active corporations: business services; manufacturing; and retail. Figure 2 is based on data contained in the data mining system of the South African Reserve Bank (SARB) and Statistics South Africa (Stats SA). From the information provided in Figure 2, it is clear that for the past decade, the annual real growth of the three selected sectors has outpaced the real GDP growth of the economy as a whole (SARB 2006). Figure 2 GDP and the selected three sectors growth performance (%), from 1994 to Business Services Retail Manufacturing GDP Source: SARB (2006) Based on the information provided, it was decided to include the business services, manufacturing, and retail sectors in the study. The business services enterprises included in the study included enterprises providing the following kinds of service: legal services; accounting, bookkeeping and auditing activities; tax consultancy; marketing research, business and management consultancy; architectural, engineering and other technical activities; and computer and related activities. 3.2 and medium enterprises According to the National Business Act, Act 102 of 1996 (South Africa 1996), a small business is a separate and distinct business entity, including co-operative enterprises and non-governmental organisations. It is managed by one owner or more. Including its branches or subsidiaries, if any, it business is predominantly carried out in a sector or subsector of the economy. businesses in each sector can be classified as micro-, very small, small or medium enterprises, based on a set of thresholds (South Africa 1996). The classification criteria for the three sectors previously identified for inclusion in the study are provided in Table 1. It should, however, be noted that the Standard Industrial Classification (SIC) differs from the classification used in the previously discussed databases. Table 1 therefore provides the classification criteria for sectors or subsectors in 118 Meditari Accountancy Research Vol. 15 No :

5 Venter & De Clercq accordance with the SIC included in the survey. An example of the different classifications is accounting firms that were previously included in business services, but that were now included in the Community, social and personal services category for purposes of the SIC. The retail sector of the study included companies classified under the Retail and motor trade and repair services sector, as well as wholesale trade, commercial agents and allied services sectors in the SIC database. Similarly the business services sector section of the study included enterprises from the Finance and business services, and the Community, social and personal services sectors in the SIC classification database. The study included medium, small and very small enterprises. As in previous studies in the SMME sector, the small and very small enterprises were combined for analytical purposes (see, for example, Tustin et al. 2005; Tustin, De Clercq & Venter 2006). Due to the disproportionate number of micro-establishments in the selected sectors, especially the business services (more than 90%), micro-establishments were not included in the study. Table 1 Classification of micro-, very small, small or medium enterprises Sector or subsectors in accordance with the Standard Industrial Classification (SIC) Manufacturing Retail and motor trade and repair services Wholesale trade, commercial agents and allied services Finance and business services Community. social and personal services Size or class Very small Micro Very small Micro Very small Micro Very small Micro Very small Micro Source: Postma, Dorfling & Van Wyk (2004) Total full-time equivalent of paid employees Fewer than: Total annual turnover (Rm) Less than: Total gross asset value (fixed property excluded) (Rm) Less than: From the three criteria prescribed to categorise businesses as micro-, very small, small or medium, the number of employees is often the most effective as, with the exception of agriculture, it can be used for comparisons across all sectors, and information regarding the number of employees is generally easy to obtain. Although a more significant indicator of size is annual turnover, it is difficult to gather this information. In the Stats SA (2004) Integrated Business Register, entities registered with CIPRO are classified by turnover. These results are provided in Table 2. Meditari Accountancy Research Vol. 15 No :

6 A three-sector comparative study of the impact of taxation on small and medium enterprises Table 2 Size distribution of SA registered corporations, according to turnover, in 2004 Number % Micro Very small Large Unkown Total Source: Stats SA (2004) It is clear from Table 2 that information on turnover is not readily available, as 67% of companies are classified as unknown. It is important to note that, although these statistics exclude firms not registered with CIPRO, for example, sole traders and partnerships, these enterprises were included in survey. It is estimated that SMMEs represent more than 95% of the country s formal business entities (De Clercq, Tustin & Venter 2006:9). Due to the lack of reliable information relating to turnover, this study, like other studies in the SMME field, applies employment figures to classify businesses. 3.3 Gauteng region According to the DTI (2006), Gauteng is the leading province for both formal and informal businesses. Gauteng accommodates 46.7% of formal SMMEs and 26.9% of informal SMMEs. KwaZulu-Natal is in second place with 12.6% of formal SMMEs and 25.3% of informal SMMEs. SARS maintains a database of the number of business services enterprises registered for levy payments in terms of the Skills Development Act, Act 97 of 1999 (South Africa 1999), by employment size and province. The database clearly indicates that most registered business services employers, namely 54.4%, are based in Gauteng (SARS 2003). On the basis of the findings regarding the distribution of business activities, it was decided to select Gauteng as the focus of the study and to limit the survey to the formal sector. 3.4 Taxes included in the study According to the 2006 Budget Review, the National Treasury estimates that government will receive R million in tax revenue (National Treasury 2006:69). Figure 3, below, indicates the main sources of tax income for the 2006/07 fiscal year. 120 Meditari Accountancy Research Vol. 15 No :

7 Venter & De Clercq Figure 3 Estimated tax revenue for the 2006/07 fiscal year 1% 10% 5% 30% Personal income tax Company tax Tax on property 28% Value Added Tax Taxes on payroll 3% 23% Customes and excise Other Source: National Treasury (2006) On the basis of the information provided in Figure 3, it is clear that personal income tax, taxes on companies and Value Added Tax (VAT) represent 81% of the total tax revenue. A summary of how each of these three main taxes affect SMEs is provided below Personal income tax and medium enterprises can contribute significantly to job creation in South Africa (Mbeki, 2006). When a business employs people, however, the business becomes an employer for income tax purposes, and therefore has to comply with the administrative requirements of the Income Tax Act. The employer must deduct employees tax from the remuneration of each employee (Venter, Hamel & Stiglingh 2006:303). The employer must complete and submit a monthly return (an EMP201), together with the payment of the employees tax that the business has deducted within seven days of the end of the month (SARS 2005a). At the end of the year the employer must issue each employee with an employee s tax certificate (an IRP5) (Silver & Klein 2005). The business must also submit an annual reconciliation (an IRP501) to its local SARS branch office within 60 days of the end of the tax year (Clegg 2004). If an employer fails to meet any of these responsibilities of an employer, it is liable for penalties and possible interest on late payments Income taxes on companies Income tax on companies has two components, namely normal tax (taxes calculated on the company s taxable income for the year of assessment) and secondary tax on companies (STC) (tax levied on dividends paid). Income tax on companies Every year the Commissioner gives public notice (via the media and Government Gazette) of the date by which a specific tax year s tax return must be submitted. If the return cannot be rendered within the prescribed period, extension must be applied for; or else penalties for late submission will have to be paid (SARS 2005c). A taxpayer can qualify for tax deductions for learnership agreements (Warren 2003:23). However, to receive this benefit, the employer has to complete an IT180 form and attach it to the tax return for the tax year in which the tax deduction is claimed (Jordaan et al. 2005:207). Similarly, to be able to qualify for the urban development incentive, the Meditari Accountancy Research Vol. 15 No :

8 A three-sector comparative study of the impact of taxation on small and medium enterprises taxpayer must furnish a certificate from the relevant municipality to the effect that the building is located in a demarcated area (Huxham & Haupt 2006:137). SMEs that earn an income in excess of R per annum are provisional taxpayers. Companies and close corporations are automatically registered as provisional taxpayers by SARS. Trusts, sole traders and partners of partnerships have to register as provisional taxpayers within 30 days of becoming liable for the payment of provisional tax (SARS 2005b:10). There are three provisional tax payments that relate to any specific year of assessment (SARS 2005b:10). The first provisional tax payment must be made within six months of the commencement of the year of assessment. The second provisional tax payment must be made no later than the last working day of the current year of assessment (Mitchell & Mitchell 2004:16). The third provisional tax payment is voluntary and may be made within six months of the end of the year of assessment just ended, if the year-end is other than the last day of February. If the year of assessment ends on the last day of February, the third payment may be made within seven months after year-end (SARS 2005b:10). Payments must be made on the payment advice of the prescribed IRP6 return, on or before the payment due date reflected on the IRP6 (SARS 2005b:20). Late payments or submission of returns can result in interest on late payments, penalties for late payment, additional tax on underpayment and additional tax on failure to submit returns. The Income Tax Act does contain a number of benefits for a taxpayer that is classified as a small business corporation, for example, special wear and tear rates (including 100% on certain manufacturing assets) and lower income tax rates. To qualify as a small business corporation, a taxpayer must comply with the following requirements in section 12E of the Income Tax Act 1962 (South Africa 1962): it must be a company as defined; the gross income for the year of assessment may not exceed R6 million (from the 2007 year of assessment onward R14 million); none of the shareholders or members may at any time during the year of assessment of the company or close corporation hold any shares or have any interest in the equity of any other company except in limited cases; not more than 20 per cent of the total of all receipts and accruals (other than those of a capital nature) and all the capital gains may collectively consist of investment income and income from the rendering of a personal service; and it may not be an employment company. STC A tax return must be submitted at the end of each dividend cycle (Huxham & Haupt 2006:242). STC is payable by an SME on the last day of the month following the month in which the dividend cycle ends. If a company fails to pay the full STC within the relevant period, interest is payable at the prescribed rate on the outstanding balance, calculated from the date on which the payment was due (Clegg & Stretch 2005:para ). In his 2007 Budget Speech, the Minister of Finance announced that from 1 October 2007 STC will be replaced with a new withholding tax on shareholders (Manuel 2007) Value Added Tax A person with taxable supplies of more than R (excluding VAT) must register as a vendor for VAT purposes, whilst persons with taxable supplies of more than R can 122 Meditari Accountancy Research Vol. 15 No :

9 Venter & De Clercq apply for voluntary registration (De Koker & Kruger 2004). After being registered as a vendor, an SME must complete a VAT return (VAT 201) and pay any VAT due to SARS before the 25th of the month following the end of the tax period (SARS 2004). A vendor must furnish a recipient with a tax invoice within 21 days of a request to do so (SARS 2004). If there is a change in the conditions of sale, a debit or credit note should be issued (Brettenny 2005). All documents must comply with the minimum requirements laid down in the Value Added Tax Act, Act 89 of 1991 (South Africa 1991). Late payment or submission of the VAT return could lead to interest and penalties being charged. 4 Research Methodology The research methodology applied in constructing a model conducive to meeting the primary research objectives of the study is explained in this section. 4.1 Sample population The sample population consisted of small enterprises (with 21 to 50 employees) and medium enterprises (with 51 to 200 employees) in the three selected sectors operating in Gauteng. Financial managers, general managers, accountants and owners of small and medium enterprises were targeted as sample elements/respondents. 4.2 Data collection methodology An interviewer-administrated telephonic interview approach was used to collect data from the sample of small and medium manufacturing, retail and business services enterprises operating in Gauteng. This method was supplemented by a self-administered approach for respondents who preferred to receive the questionnaire by fax and completing and returning it via the same route. 4.3 Sample The Bureau of Market Research s (BMR s) Register of Business Services Establishments (BMR 2004a), its Register of Manufacturers (BMR 2004b) and its Register of Wholesalers and Retailers (BMR 2004c) were used as a sample frame. To ensure that only SMEs that operate in the manufacturing, retail or business services sectors in Gauteng would be selected from the sample frame, all foreign elements, for example, large business services enterprises (with 200+ employees), were excluded from the database. The sample frame was used to select a sample from each of the three categories included in the study. Table 3 shows the sample sizes per manufacturing SME category. Table 3 Sample size per SME manufacturing category SME Category Initial sample size N % manufacturing SMEs (20-50 employees) manufacturing SMEs ( employees) Total manufacturing SMEs The proportionate distribution of the sample between small and medium manufacturers was based on the size of the total number of manufacturing establishments listed in the BMR database by manufacturing subgroups. Table 4 shows the sample size for the SME retail subgroups included in the survey. Meditari Accountancy Research Vol. 15 No :

10 A three-sector comparative study of the impact of taxation on small and medium enterprises Table 4 Sample size per SME retail category SME category Sample size N % retail SMEs (20-50 employees) retail SMEs ( employees) Total retail SMEs The proportionate distribution of the sample between small and medium retailers was based on the size of the total number of retail establishments listed in the BMR database by retail subgroup. Table 5 shows the sample size for the SMME business services subgroups included in the survey. Table 5 Sample size per SME business services category SME category Sample size N % business service SMEs (21-50 employees) business service SMEs ( employees) Total business service SMEs Table 5 reflects a disproportionate distribution of the sample between small and medium business services enterprises. This approach ensured that at least 30 medium business services enterprises were included to ensure representation from this segment for analytical purposes. A systematic stratified sample was used to select the SME samples. To meet the objectives of the study, an interviewer-administrated paper-based questionnaire was designed. Questions to meet the objectives of the study were compiled in consultation with role players such as the National Treasury and SARS. The questionnaire consisted of 32 questions, including questions to elicit both closed-ended and open-ended responses. Various data capturing and verification procedures were followed to ensure the accuracy of the data. 4.4 Validity of the data A total of 379 responses were received, which represents a response rate of 67.7% for the survey. Sample surveys are subject to error and mainly yield estimates, but no precise values. Sample error occurs when a sample selected is not perfectly representative of the population. The formula for the allowable sample error is the following: E x z Where E = allowable error; and z = number of standard deviation units that will yield the desired level of confidence (90% level of confidence). When one takes the potential sample error into account, it is possible to state a confidence interval that will probably contain the population parameter. Table 6 below shows the 124 Meditari Accountancy Research Vol. 15 No :

11 Venter & De Clercq interval estimate for the total population based on a 90% level of confidence for the research variables studied in this survey. Table 6 Interval estimates for the selected research variables Sample statistic Interval estimate* Research variable Value Lower Higher Handling Skills Development Levy (SDL) internally manufacturing Burden to comply with tax regulations has increased substantially over past three years manufacturing Handling Skills Development Levy internally retail Burden to comply with tax regulations has increased substantially over past three years retail Outsourcing capital gains tax functions business services Burden to comply with tax regulations has increased substantially over past three years business services * 90% level of confidence. Standard error = s p p( 1 p) n The table shows the interval estimate for the selected variables. On the basis of a 90% level of confidence, it is clear, for example, that as many as 93.1% and as few as 75.7% of small manufacturing enterprises deal with SDL functions internally. 5 Analysis and interpretation of research findings This section provides an analysis of the tax survey conducted amongst small and medium enterprises in the three selected sectors in Gauteng during the period from August 2005 to January Corpographic profile Table 7 provides information relating to the respondents per subcategory of SME that participated in the study. Table 7 Participants per sample group SME category Sample frame distribution Sample respondents % n % manufacturing enterprises manufacturing enterprises Total manufacturing enterprises retail enterprises retail enterprises Total retail enterprises business services enterprises business services enterprises Total business service enterprises Meditari Accountancy Research Vol. 15 No :

12 A three-sector comparative study of the impact of taxation on small and medium enterprises Because a proportionate stratified sampling approach was followed in the manufacturing and retail samples, no data weighting was required to support the statistical analysis, as this design ensured a self-weighting design. The final response distribution per SME subcategory was regarded as sufficient to support sound statistical analysis per SME category. In analysing the information for business services enterprises as presented in Table 7, it was clear that there is a disproportionate distribution of the respondents across the SME category. Consequently, for analysis purposes, this required the weighting of the survey results. The weighting factors used to inflate the survey findings were based on the size of the business records maintained by the BMR. The BMR database shows a similar distribution of SME categories as that maintained by SARS (De Clercq et al. 2006:42). The weighting factors used for business services enterprises were the following: SME category Weighting factor enterprises 0.54 enterprises 0.46 Figure 4 and Table 8 further profile the participating SME business services enterprises according to selected characteristics. Figure 4 Average number of years SME has been in operation Years Manufacturing Retail Business services Figure 4 shows that the participating SMEs were fairly experienced considering their average number of years in operation. The mature status of participating SMEs is very encouraging for collecting objective and reliable data. 126 Meditari Accountancy Research Vol. 15 No :

13 Venter & De Clercq Table 8 (i) (ii) Profile of participating SMEs by selected characteristics Average number of full-time staff Characteristics - Manufacturing Retail Business services Average number of full-time administrative staff - Manufacturing Retail Business services 7 12 (iii) Percentage of full-time administrative staff dealing with tax matters - Manufacturing 15% 15% - Retail 49% 45% - Business services 34% 35% Based on the information provided in Table 4, it is clear that the percentage of time administrative employees spent dealing with tax matters depends on the sector in which an enterprise operates and not on the size of the enterprise. The survey results support government s view that the SME sector should be targeted for future growth. The information indicates that the longer a business is in operation, the larger it becomes and the more people it can employ. For example, on average, small businesses that have been in existence for 15 years employ 24 full-time staff members, while medium businesses that have been operating for 24 years employ an average of 97 full-time staff members. It should therefore be a priority to ensure that as many of the small enterprises grow to become medium organisations. For tax purposes, annual turnover is an important criterion in determining whether a corporation can be classified as a small business corporation. An analysis of the turnover per category is set out in Table 9. Table 9 SMEs per sector by turnover* Manufacturing Retail Services Turnover % % % Up to R >R R1 million >R1 million-r2 million >R2 million-r5 million >R5 million-r10 million >R10 million-r15 million >R15 million * Excluding refusals It is evident from the information that the participants in the survey contribute significantly to economic activity in Gauteng. A further analysis of the turnover per sector indicates that there is a positive correlation between the number of employees and turnover. This analysis indicates that government is targeting the correct section of the sectors in terms of small Meditari Accountancy Research Vol. 15 No :

14 A three-sector comparative study of the impact of taxation on small and medium enterprises business corporations. All small enterprises in the business services and retail sectors qualify as small business corporations in terms of the turnover rule. 5.2 Management of administration of taxes In order to determine how SMEs in the different sectors manage and administer the different taxes for which they are liable, the research design model started by establishing who is responsible for ensuring these SMEs tax compliance. Most of the respondents indicated either that they are responsible for managing and administering the tax function internally or that they outsource the functions. Due to the complex nature of taxation and the various administrative requirements, some of the respondents indicated that they perform routine work relating to certain taxes internally and outsource the more complex part of the tax functions Employees tax As indicated in Section 3.4 of this article, employees tax is the main mechanism employed by government to collect personal income tax. The responsibility of ensuring that this tax is collected and paid to SARS lies with the employer. Figure 5 indicates the percentage of enterprises that outsource their responsibility to administer employees tax. Figure 5 Percentage of enterprises that outsource employees tax responsibilities 40% 30% 38% 33% 31% 23% 20% 10% 7% 4% 0% Manufacturing Retial Business Services Based on the information provided, it is clear that the size of the enterprise has an impact on whether the employees tax function is administered internally the larger an enterprise, the greater its capacity to administer this function. This could be due to the fact that larger enterprises employ more workers and the employees tax function is largely a routine task. An interesting finding from the survey is that medium retail enterprises are more inclined to outsource their employees tax function than medium enterprises in manufacturing or business services. 128 Meditari Accountancy Research Vol. 15 No :

15 Venter & De Clercq Taxes of companies: Normal income tax Figure 6 indicates the ratio of SMEs that manage and administer their income tax responsibilities internally compared to those enterprises that outsource their responsibilities. Figure 6 Internal/outsource ratio: income tax 90% 80% 70% 60% 50% 40% 30% 20% 18% 51% 54% 84% 75% 46% 42% 57% 76% 71% 40% 28% 10% 0% Internal - Outsource - Internal - Outsource - Manufacturing Retail Business services It is evident from this figure that the majority of manufacturing enterprises (small and medium) elect to outsource their responsibility to manage income tax. It is also evident that the majority of business services enterprises take responsibility for their income tax affairs internally Taxation of companies: STC The second type of tax that is levied on companies is STC. Of the enterprises included in the study that are subject to this tax, some outsource the administration of this tax. The percentage of corporations that elect to outsource this function as compared to those that elect to perform it internally is presented in Table 10. Table 10 Outsourcing STC responsibilities* Percentage of respondents that elect to perform function relating to STC internally % - Manufacturing Retail Business services Percentage of respondents that elect to outsource function relating to STC - Manufacturing Retail Business services % * Note: not all respondents in the survey were subject to STC, due to the fact that they did not all declare a dividend and some were not companies as defined. Meditari Accountancy Research Vol. 15 No :

16 A three-sector comparative study of the impact of taxation on small and medium enterprises The results in Table 10 clearly indicate that manufacturing SMEs are more inclined to outsource their responsibility for STC than enterprises in the other sectors are. It is also evident that the internal management and administration of the STC function is more prevalent among larger enterprises Value Added Tax Figure 7 provides an indication of the ratio of enterprises that perform VAT functions internally compared to those that outsource this function. Figure 7: Internal/outsource ratio: Value Added Tax Bus. services - medium Bus. services - small Retail - medium Retail - small Manufacturing - medium Manufacturing - small 0% 20% 40% 60% 80% 100% Internal Outsource It is apparent from Figure 7 that the size of an enterprise has a direct impact on its ability to administer and manage the VAT function internally. However, it is interesting to note that just over 40% of both the small and medium retail enterprises outsource their VAT functions Reasons for outsourcing To enable a greater understanding of why SMEs outsource tax functions and responsibilities, the respondents were asked to identify the main reasons for doing so, if they did opt to do so. The main reasons for outsourcing are set out in Table 11. Table 11 Reasons for outsourcing tax functions Reason for outsourcing Manufacturing Manufacturing Retail Retail Business services Business services % % % % % % Unskilled tax staff Cheaper to outsource Time factor Meditari Accountancy Research Vol. 15 No :

17 Venter & De Clercq The SME respondents indicated that a lack of time is one of the main reasons, across the different sectors, for outsourcing tax functions. A large proportion of SMEs also indicated that they outsource due to a lack of skilled tax staff, which indicates a need for tax training in order to deal more effectively with tax functions and responsibilities internally. 5.3 Role of tax functions in the management of the business The research model was designed to establish the value of tax inputs/advice/information to SMEs in business planning and management. It is clear from the analysis presented in Table 12 (below) that small and medium enterprises hardly use tax inputs/advice/information for management and planning purposes. This suggests that SMEs either do not have the required skills to utilise tax inputs as a strategic management tool, or that they do not see the potential advantages of an effective tax information system in support of business planning and strategising. Table 12 Value of tax inputs/advice/information Tax functions are only performed because they are compulsory % % - Manufacturing Retail Business services Inputs from tax staff/division/consultants are used for short-term tactical business planning - Manufacturing Retail Business services Inputs from tax staff/division/consultants are used for long-term strategic planning - Manufacturing Retail Business services Preferences for tax relief measures There are various incentives to support and promote growth of the SME sector. These incentives range from government grants made by the DTI, for example, the, Enterprise Development Programme (SMEDP), the Critical Infrastructure Programme (CIP) and the Skills Support Programme (SSP) (Deloitte & Touche 2005:87). There are also a number of fiscal incentives for SMEs, for example, Business Corporations legislation, special allowances for manufacturing enterprises, roll-over relief for capital gains tax and capital gains tax exclusion for the disposal of small business assets; and small business corporation vendors qualify as Category F vendors (Deloitte & Touche 2005:87). Respondents were asked to indicate whether or not they have ever made use of any of the following incentives. The findings are presented in Table 13. Meditari Accountancy Research Vol. 15 No :

18 A three-sector comparative study of the impact of taxation on small and medium enterprises Table 13 Utilisation of different incentives Incentives Manufacturing Manufacturing Retail Retail Business services Business services % % % % % % Government grants Learnership incentives Tax rates for small business corporations Many SMEs clearly do not use the support programmes available to them. Further investigation indicated that one of the main reasons for the lack of use of the different incentives available is that SMEs are not aware of the different incentives. The requirements and process to apply for the incentives might also be a limiting factor. The research model was also designed to determine which of a range of possible options to reduce tax compliance burdens SMEs would prefer. A preference index was compiled to assess the preferences for the various tax measures presented to the SMEs. This index was compiled by allotting multiplicator values to each of the rating options presented to the SMEs. The multiplicator values allotted to each of the rating options were as follows: not preferred = 0; preferred = 50; and highly preferred = 100. Figure 8 Preference index for tax measures for small enterprises Fewer VAT returns Resolve disputes between SMEs & SARS Reduced penalties/interest SARS help desk' Reduced tax rates for SMEs Manufacturing Retail Business services 132 Meditari Accountancy Research Vol. 15 No :

19 Venter & De Clercq The first choice for small manufacturing enterprises was a reduction in tax rates. Both small retail and business service enterprises preferred choice was a reduction in penalties and interest rather than a reduction in tax rates. Figure 9 Preference index for tax measures for medium enterprises Fewer VAT returns Resolve disputes between SMEs & SARS Reduced penalties/interest SARS help desk' Reduced tax rates for SMEs Manufacturing Retail Business services The first preference for SMEs in all three sectors is a reduction in penalties and interest, followed by a desire for a SARS helpdesk to provide information on taxes and a reduction in the tax burden on SMEs. 6 Conclusion The SME sector continues to play an important economic role in the creation of wealth and job opportunities, thereby making a valuable contribution to the accelerated and shared growth strategy. The study found that the size of an enterprise and the sector within which an SME operates affects which tax functions are outsourced. Generally, tax matters are not considered an important input for making business decisions or for planning for the future of enterprises. The study provides South African regulators with insight into the effect of taxation on SMEs and into how SMEs attempt to manage their tax risks. The study has also identified areas which should be investigated further to provide appropriate tax and tax administration relief for SMEs. So, for example the study found that SMEs across the three sectors prefer a reduction in penalties and interest rather than a reduction in the tax rate. From the study it is also clear that very little money is spent on tax skills development in enterprises. It can therefore be argued that the development of tax skills can help to SMEs to reduce outsourcing costs and promote their long-term survival. Meditari Accountancy Research Vol. 15 No :

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