Don’t get me wrong, I like the idea of any tax that is simple to comply with and fair to the market it appeals to. In this case, micro businesses. I even have clients on this tax system… but they are less than 1% of our client base.
Micro businesses are considered businesses with turnover below R1 million and the owner is not involved in any other businesses. So what you would consider any new start up business, or established business that is supporting the owner and not growing too fast. To have a very simple tax compliance process for this emerging group, that is also a very low tax rate seems to be the ideal.
But, turnover tax did not really succeed in what it was setup to do : give micro businesses an easy step up before diving into the real tax compliance world.
So as a business with turnover less than R1 million per annum, why do you probably not qualify, or won’t be recommended to register for this tax type.
• The list of excluded businesses types (classified as “professional services”) are very broad. These include accounting, broadcasting, consulting, education, engineering, health, IT, management, research… The full guide has a bit more detail on each classification, but in my experience it covers a very large portion of small entrepreneurial start-up businesses.
• It is so difficult to reconcile good accounting practice with the requirements. To advise a client to not keep any record of expenses and only record turnover feels wrong. It does not make good business sense. The difficulty also comes in when you need financial statements, and no records have been kept. Banks sometimes ask for the last three years financial statements, and the cost of then drawing up proper books and financial statements, can negate the simplicity of only recording turnover for tax. You may only need turnover for tax purposes, but good sense tells you to still keep bookkeeping records.
• It becomes especially complicated when a company registers for Turnover Tax. The companies act has certain requirements which do not begin and end with only recording turnover, such as a company issuing financial statements and also the issue of deemed dividends on Directors loan account drawings. When a company is required to meet all Company obligations there is no saving in accounting fees, bookkeeping requirements or statutory requirements.
• If a Business does not keep accurate record of its income and expenses, it may be paying tax on its turnover, when in fact it could have been paying zero tax as it was running at a loss.
• The whole process is manual. Which generally requires a trip to sars, rather than filing online. Not ideal!
I want to like Turnover Tax. I want to recommend it to clients. When they come to you with a passion and a dream, and you then start seeing it fade in the abyss of accounting and tax compliance, you wish it could be simpler and cost effective. But unfortunately, for many, Turnover Tax is not the answer to that problem.
My suggestion is don’t think like a small business. Get your invoicing and bookkeeping system setup from day 1. There are free and low cost online options. Look at the complete picture of your business – no matter how small. Know your turnover, profit and summary of your expenses. And with all this information available you can review whether the the turnover tax type is suitable for you, or not. And if you do manage to qualify for Turnover Tax, keep your bookkeeping records going for your own business planning purposes, and in case you ever need financial statements. It will give you the right business frame of mind for when your micro business grows into a small or medium business.
So there is a place for Turnover Tax. But it’s for a very, very small group of taxpayers. And with most accountants not recommending it (with valid reasons), and the ones that do, only finding 1% of clients qualify, it’s not the tax answer our small business clients need.