Small businesses in South Africa are often managing multiple priorities such as business efficiency, innovation and growth. Amidst these daily challenges, many overlook the value of claiming the full range of tax benefits available to them.
The Tax Base at a Glance
At the forefront of this movement is the South African Revenue Service (SARS), which collects the bulk of its revenue from three main sources – Personal Income Tax (PIT) at 37.4%, Value Added Tax (VAT) at 25.7%, and Company Income Tax (CIT) at 18.2%.
The SARS’s tax ecosystem is large and multifaceted. In 2023/24, there were 959,000 registered VAT vendors, but only 488,118 were active, amounting to just 50.9% of the total. Out of 3.6 million registered CIT taxpayers, only 1.16 million are actively contributing – 643,948 are registered for PAYE, 389,302 are registered Trusts, and a mere 172,611 registered for Small Business Corporation (SBC) tax. Although over 1 million businesses were assessed for CIT in 2023/24, a staggering 66.5% of all CIT revenue came from just 549 companies. In fact, only 14.8% of assessed companies registered for SBC tax, indicating that many small businesses either report zero or negligible taxable income.
Despite the impressive growth revealed in the latest tax statistics, it’s clear that a significant gap exists. There is great opportunity for small businesses who are underrepresented in tax compliance and contribution to review their tax strategies and reap the rewards of compliance.
Significant Revenue Growth Signals Positive Change
SARS’s total tax revenue has shown impressive growth, from R1,355.8 billion in 2019/20 to R1,740.9 billion in 2023/24, marking an annual increase of 3.6%. This growth is a testament to two key factors. Firstly, SARS has invested heavily in advanced technology to simplify and streamline tax filing processes. Secondly, there is an increasing number of small businesses that are growing their education around tax, often guided by the crucial advice of their accountants.
“SARS is a well-run organisation that is currently using and planning to increase the use of technology, especially AI, to improve its already efficient processes. VAT and Payroll eFiling are examples of great innovations that have made the process smoother for taxpayers and increased compliance. Small businesses should follow and be modernising their thinking and systems. Using digital tools to manage your finances and working with a digital-minded accountant will help small businesses keep up with SARS’ efforts,” says Colin Timmis, Country Manager at Xero South Africa.
Tax Incentives Tailored for Small Businesses
While SARS is investing in making tax filing processes even more efficient through advanced technology, there are still very few small businesses reaping the rewards of available tax incentives. For example, there was a 15.5% increase in the limit for the first SBC tax bracket, from R79,000 to R91,250 for the 2023 tax year. This change allows small businesses to earn more income before facing higher tax rates. Enabling small businesses to retain more of their earnings signals a more supportive policy environment for SBC growth. However, only 172,611 businesses have registered for the SBC tax regime in 2023/24. This low uptake highlights a missed opportunity. Not enough small businesses are taking advantage of such incentives that directly support their growth and profitability.
More Small Businesses Registering for VAT
When examining VAT compliance, 53.0% of active VAT vendors have a turnover of R1 million or less, yet they only account for 5.6% of Domestic VAT payments. This highlights both the challenge and the potential of SMEs within the realm of VAT. With better financial practices and a focus on tax compliance, these businesses stand to not only improve their contribution to the economy but unlock greater business success for themselves.
However, Pieter Faber, Executive: Taxation at SAICA cautions that careful consideration is required for whether a small business justifies VAT registration. “VAT can be a compliance burden and can place additional cash flow constraints on a small business when debtors pay late or are on 30 day + payment terms. However, where it makes sense for a small business to register for VAT, it’s important to ensure their financial systems are properly set up so that standard VAT transactions are easily identified and correctly processed.
Faber also emphasises the importance of tax education for SMEs: “Understanding your tax types and tax compliance obligations is critical to any SME, regardless of whether they use a tax professional. SARS assists with taxpayer education and understanding the basics of tax. In addition to the SARS YouTube channel, they’ve held 215 taxpayer workshops to support taxpayers to better understand their tax obligations.”
Challenges Faced by Small Businesses
Another concerning statistic from the 2022 tax year reveals that only 20.7% of companies declared a positive taxable income, with 54.6% reporting zero taxable income. However, small businesses actually did a lot better with 57.5% declaring a positive taxable income even with only 4,261 small businesses having a taxable income in excess of R1m.
“What the stats say is that small businesses are more likely to be profitable but at a much smaller scale and they contribute very little to tax revenue. Cash flow is therefore critical given these small margins,” says Faber.
Colin Timmis says: “This underscores the need for smarter financial management tools and more professional support. SARS is at the forefront of digital transformation reshaping how businesses interact with tax compliance. For SMEs, adopting digital tools under the expert advice of their accountants is not just about ensuring that they are up to date with regulatory changes. It unlocks the opportunity to enhance overall business efficiency. Xero helps simplify overall financial management but especially tax compliance by enabling direct eFiling of VAT and PAYE returns to SARS, making compliance less of a burden for small businesses.”
Building Trust Through Improved Compliance
Public confidence in SARS has seen an increase from 71.8% in 2021/22 to 77.5% in 2023/24. This rising trust, combined with easier filing thanks to digitisation, paves the way for stronger relationships between SARS and businesses. For small businesses, this not only means smoother compliance processes and less stress but enhanced transparency and accountability, which are all critical factors for long-term financial success.
SARS is taking positive steps to continue building public trust by delivering on their plans and communicating progress along the way. But there is still room for improvement in the tax system. There are things SMEs can be doing to compliment SARS’ efforts and benefit their own businesses and the economy.
“SARS has a clear vision and strategy for how to improve the tax system. Small businesses should have the same level of focus on their tax and accounting processes, and work with their accountant to outline goals and objectives,” says Timmis.
He adds, “It’s crucial that business owners, accountants, and tax advisors work alongside each other to develop forward-thinking tax strategies that consider current frameworks as well as future prospects. In a world where every rand and cent counts, it’s less about questioning if you can afford to claim these tax benefits but rather, can you afford not to.”
Small businesses are the backbone of South Africa’s economy and by harnessing every tax advantage available they can free up critical resources for growth and innovation. However, this relies on small businesses seeing tax compliance as less of an administrative obligation and more of a strategic asset.
