The South African Revenue Service represented by

1

• .
• The South African Revenue Service represented
  by
• Mr. Vinesh Pillay
• TOPIC Strategies for improving the quality and
  accuracy of SME bookkeeping
• ITD Global Conference on Taxation of Small and
  Medium Enterprises Rwanda 2009
• 10h00, Thursday, 23 April 2009 Parallel
  Session B

2
OVERVIEW

• .
• Introduction Nature of SMEs
• Forms of SME bookkeeping
• The Bookkeeping Burden
• The Need for Bookkeeping
• Strategy Points to consider
• Tax Incentives
• The South African Experience
• Manual
• Computer Software
• Mobile Phone
• Conclusion

3
NATURE OF SMEs

• .
• Internationally it has been shown that one of
  the reasons small businesses fail is burdensome
  bookkeeping regulations that are imposed on them.
• However, tax authorities also find it hard to
  tax small businesses due to Inadequate
  record-keeping and weak financial controls.
• Typical characteristics of SMEs
• Informal and try to stay off the regulatory radar
  screen fear administration burden and
  associated costs.
• Less sophisticated.
• Owners are usually not very well educated or
  skilled.
• Financially constrained.
• Have minimal access to infrastructure.
• Have minimal access to marketing, communication,
  and computer facilities.
• Understaffed.
• Come in different forms e.g. sole proprietor,
  partnership, close corporation, company.
• Nature of SMEs is unique in each country.
• Seldom maintain proper records.
• Pay no or very little tax.

4
BOOKKEEPING BURDEN

• .
• Bookkeeping varies based on the size and
  sophistication of the business. For SMEs, these
  are broadly none, back of cigarette box,
  pieces of paper, journals and workbooks,
  management accounts, full set of financial
  statements and tax docs, and computer software
• The bookkeeping compliance burden for small
  businesses
• Various laws and regulations imposed by various
  stakeholders e.g. common law, organisational
  laws, labour laws, consumer laws, bank laws,
  accounting and tax laws.
• Various tax products have unique bookkeeping
  requirements e.g. income tax versus VAT versus
  payroll taxes.
• These often accumulate over long periods of time
  without the necessary reviews and consolidation.
• Government agencies form a large part of
  stakeholders.
• Regressive burden on small businesses.
• Small businesses dont comply because
• Poor management and controls focus on survival.
• Cash-based which reduces need for records.
• Limited resources and technology.
• Regulatory authorities focus more on larger
  businesses.

5
NEED FOR BOOKKEEPING

• .
• Business need for bookkeeping
• Enable sound management cash flow and banking
• Improve control can tell if making enough
  money to meet expenses
• Save time and money through simple administration
  processes
• Produce accurate financial information that can
  assist in obtaining financing from financial
  institutions
• Produce accurate information to assist with
  qualification for growth and development
  programmes
• Filing of accurate tax returns
• account for, understand, communicate, plan and
  manage affairs.

6
NEED FOR BOOKKEEPING

• .
• Authorities need for bookkeeping
• documented evidence (proof) of the taxpayers
  declaration
• Need regulations to avoid unfair, aggressive
  competition between market entrants and
  established, fully compliant businesses
• Need regulations to monitor and measure the
  informal economy to know what we are dealing
  with, e.g. crime and tax gap, so that appropriate
  measures/solutions can be put in place to address
  shortfalls
• Need individuals to learn good habits of
  compliance to be responsible democratic citizens
• Compromise
• Need to create a harmonious balance between
  reducing the
• bookkeeping burden and the need for records to
  enable small
• businesses to grow into responsible citizens and
  make a
• meaningful contribution to the economy of the
  country.

7
STRATEGY

• Points to consider in easing the bookkeeping
  burden
• Tax incentives.
• VAT registration threshold.
• Cash versus accrual VAT and income tax.
• Segmentation cater for different businesses
  based on size and sophistication.
• Graduation system to avoid cliff-edge drop into
  the formal bookkeeping system.
• Aligning of requirements of different regulatory
  authorities and within each authority, especially
  Government, e.g. accounting versus tax and
  different tax instruments.
• Cooperation with third parties e.g. banks and
  cell phone banking.
• Access to tax practitioners and cost of their
  services.
• Manual versus technology.
• Risk analysis dont want to lose tax and
  perpetuate bad habits.
• Cost effectiveness investment with good future
  returns.
• Outreach and education.

8
TAX INCENTIVES

• .
• Tax incentives to ease the bookkeeping burden and
  encourage graduation
• Presumptive tax assumptions mean less
  bookkeeping.
• Rebuttable presumptive tax - lower tax rates
  where there is record keeping with graduation to
  formal tax system.
• Presumptive tax - progressive rates versus flat
  rates.
• VAT registration threshold.
• Cash basis.
• Tax credits or accelerated write-off or immediate
  expensing of equipment and software used for
  bookkeeping.
• Double deduction for fees paid to accredited
  accountants and tax practitioners.
• Subsidise small businesses that use tax
  practitioners.
• Subsidise/train tax practitioners.
• Train school leavers to be community tax helpers.

9
TAX INCENTIVES

• .
• Problems with tax incentives
• Small businesses do not want to pay tax and
  choose to stay off the radar.
• Small businesses do not want to interact with tax
  authorities as they are overwhelmed by the
  bookkeeping compliance burden. Expensive.
• Presumptive tax may be too low or not aligned
  with formal tax system encourage bad habits and
  disincentive to migrate to normal tax system.
• Tax incentives may require additional bookkeeping
  vicious cycle.
• Most small businesses are not liable for tax so
  accelerated write-offs/double deductions will not
  be of benefit other than create losses.
• Subsidising tax practitioners may distort the
  market.
• Tax practitioners may not pass on subsidy
  benefits to clients.
• Possible solutions
• Tough Enforcement campaign but need to support
  and encourage.
• Ease the bookkeeping burden e.g. bookkeeping
  innovations that will make bookkeeping simpler so
  that it will not overwhelm taxpayers.
• Education and outreach by tax authorities.

10
SOUTH AFRICAN EXPERIENCE

• .
• Informal and formal economies rolled into one.
  Records of informal economy
• Nothing 25 Journals 24 source docs 27
• Computers 5 Dedicated Personal Computer 13
  Internet 7.
• 75 feel it is important to keep records.
• 75 operate on cash-only basis.
• SA tax system and bookkeeping
• Definition of small business Various - turnovers
  of R1 million, R1.5 million, R2.5 million and R14
  million.
• A business must retain records for 5 years.
• records include ledgers, cash books, journals,
  cheque books, bank statements, deposit slips,
  paid cheques, invoices and stock lists and all
  other books of account and any electronic
  representations of information in any form.
• VAT on payments basis threshold of R2,5
  million.
• Small Retailers VAT Package account for VAT on
  simplified record keeping for those businesses
  that do not have sophisticated point of sale
  equipment threshold of R1 million and industry
  mark up of 40.
• Small Business Amnesty offered in 2007.
• Free Easyfile software enables employers,
  practitioners and individual taxpayers to
  download and complete transactions with SARS
  offline.

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SOUTH AFRICAN EXPERIENCE

• .
• Easing of bookkeeping burden Tax
• New turnover tax with effect from 1 March 2009
  for businesses with a turnover of up to R1
  million (US 110,375 at 20/04/2009) cash basis.
• VAT registration threshold increased to R1
  million.
• Must keep following records for the year amounts
  received, dividends declared, each asset and
  liability of more than R10,000 (US 1,104 at
  20/04/2009).
• Graduation - progressive tax rates to encourage
  record keeping and migration to the formal system
  at higher end of turnover spectrum.
• Easing of Bookkeeping burden Accounting
• Opinion that IFRS reporting standards for small
  businesses too complicated.
• SAICA developing new set of accounting reporting
  standards that are simpler and cheaper, minimal
  deviation from management accounts and least
  amount of adjustments.
• New Companies Act reduces regulation and removes
  audit function for small businesses.

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MANUAL BOOKKEEPING

• .
• For start-up, unsophisticated small businesses
• Available to natural persons up to a threshold.
• Cash basis.
• Presumptive turnover tax or align cash accounting
  profit with taxable income.
• Cash book template.
• Daily totals of income and expenses transferred
  to monthly/annual templates.
• Records of assets and liabilities template
  audit tool.
• Simple tax tables.
• Can be more sophisticated with books of first
  entry leading to income statement.
• Specific record-keeping fact sheets for specific
  industries.
• Graduation to computer software with tax
  incentives for computer and free software.

13
COMPUTER SOFTWARE

• .
• Provide free accounting and payroll software
  with tax functions
• Work with other organisational authorities e.g.
  accounting and piggy back off their systems
  accounting profit taxable income.
• For technology able businesses must be able to
  run software on computers and/or have internet
  access.
• Consider computer kiosks with internet access at
  tax authorities.
• Software should generate automatic tax reports
  and returns submission via e-filing.
• Drawing on experience in other countries, working
  on SARS Practical Accounting-Record Keeping
  system (Spark).
• Free distribution of software by tax authorities.
  

14
MOBILE PHONE

• .
• Possible features
• SIM-card based software application that allows
  business owners or tax practitioners to log and
  manage transactions through a centralised server
  (based and run at tax authority).
• With tax practitioners transaction log that is
  interfaced with tax practitioners outcome is
  trial balance in electronic format that will be
  processed into financial statements and tax
  reports/returns.
• Small business owner goes to tax authority, his
  tax details are verified and the software is
  loaded onto his personal mobile phone.
• Loading via a SIM-card onto a mobile phone,
  including contact details, PIN and a link to the
  server (at tax authority).
• Example, small business owner purchases goods and
  dials up to log the transaction.
• Transaction is logged and reference number for an
  invoice is given.
• At month end/or other intervals, the log of all
  recorded transactions can be downloaded with PIN
  via the internet or at tax authority.
• The owner decides what to log with tax authority
  and all stakeholders have clean records.
• Cross reference and comparison with sales side of
  supplier.

15
CONCLUSION

• .
• Need to balance the need for bookkeeping with
  easing of the compliance burden.
• Tax incentives not very effective as most small
  businesses are not liable or too overwhelmed to
  interact with tax authority.
• Presumptive tax to reduce bookkeeping burden.
• Graduation system to avoid cliff-edge drop into
  formal system.
• Incentives to migrate to the formal tax system.
• Segmentation based on size and sophistication
  of business.
• Ease bookkeeping burden by innovative bookkeeping
  and outreach.