Taxation compliance burden for small business in South Africa

Abstract

The world over it has been recognised that the small business sector plays an important, if not critical, role in the economic and social development of a country. This sector, however, states that complying with taxation regulations is a constraint on their growth, due to the costs they have to incur to become and remain tax compliant. The objective of this study is, therefore, to provide an overview of what has been researched to date in the area of tax compliance costs for small businesses in South Africa and to ensure that duplication of research efforts do not occur. In order to achieve this objective, the definition of ‘small business’ both from an economic as well as taxation perspective is necessary as certain grants and benefits are only available to small businesses. What exactly constitutes the compliance costs of taxation is the next area that requires attention. This has been a topic that has been explored and defined, broadly and specifically in many studies conducted around the world. Although there is still controversy regarding what exactly constitutes taxation compliance costs, there is one definition that is generally accepted amongst most researchers. This definition includes the costs incurred in respect of the taxpayer’s time on understanding the rules and applying them, the record-keeping costs, the payments made to professional advisors and incidental costs incurred by the small business. The methods and techniques used in quantifying these costs have also differed per country and per study, which makes comparisons between countries and even taxes in the same country very difficult. One of the costs of complying with the taxation regulations is the payment to tax practitioners. It is evident that tax practitioners are frequently used by small businesses both locally and internationally. The payment to these tax practitioners is usually incurred due to the fact that the small business owner neither has the time nor the expertise to deal with these matters. These tax practitioners are, therefore, a valuable commodity when it comes to obtaining research information into tax compliance costs for small businesses as they have first hand knowledge of these costs that the small businesses face. The use of these tax practitioners and the true facts about other tax compliance costs and their impact on small businesses in South Africa was established by reviewing the studies done on this matter in South Africa. From the studies reviewed, it was found that there has been some focus on small businesses and their tax compliance costs (with the assistance of tax practitioners in certain cases), but these are very limited. The most critical research that might still be required in the future is as follows: <ul> <li>1. Definition of ‘small business’ – including ‘formal’ and ‘informal’ small businesses</li> <li>2. Definition of ‘tax compliance costs’</li> <li>3. Survey of tax practitioners to identify the principle time and cost burdens on ‘formal’ small businesses associated with preparing and filing tax returns for the most common business taxes, the procedures for paying taxes, and going through tax inspections or audits, including fines and other tax-related payments etc.</li> <li>4. Survey of ‘formal’ small businesses, per sector, to establish their actual compliance costs per tax and per function underlying each tax (for example: registration, payment etc).</li> <li>5. Survey of the ‘informal’ small business sector to establish their perceptions about taxation and the costs involved in becoming compliant</li> </ul> It is hoped that these studies will be conducted on a national basis to ensure that government is presented with representative empirical evidence in order for it to be properly informed to make the necessary changes to assist small businesses with their tax compliance burden. Copyright