Lockdown challenged the governance compliance efforts of large businesses and informal traders alike. What if the solution to both their problems is Enterprise and Supplier Development (ESD)?
Could a collaboration between transformation consultancy BEE Novation and SAICA Enterprise Development (SAICA ED) alleviate the compliance pressures of big and small businesses alike, while addressing socio-economic challenges such as unemployment and tax revenue shortfalls? At a time when the relevance of Broad-Based Black Economic Empowerment (B-BBEE) is under public scrutiny, it would be a pleasant surprise if the answer were yes.
“YES is only part of the answer,” explained Lee du Preez, the MD of BEE Novation. “The Youth Employment Service (YES) is an initiative that allows businesses to claim up to a two-level increase on the B-BBEE scorecard, sometimes more cost-effectively than implementing other elements. It can also be structured to have a greater bang-for-buck in terms of empowering youth from economically marginalised communities. By integrating it into SAICA Enterprise Development’s intervention, we can run a model that potentially puts more businesses into the formal sector than were there prior to the pandemic.”
In an eNCA interview on Ipsos’ survey on what worries the world, Marie Harris told eNCA’s Dan Moyane that South Africans reported being most concerned about “unemployment, financial and political corruption, crime and violence, poverty and social inequality” and of course, “Coronavirus”, saying, “There are eleven other countries who feel the same way, not necessarily about the same issues, but that Covid-19 is not necessarily at the top of their list.” This emphasises the importance of saving livelihoods alongside lives, which further highlights the governance compliance challenges atop established companies’ priority lists with February financial year-end almost here. At the same time, small businesses are deciding whether their time and resources should be spent on, say, tax compliance or on driving sales to pay suppliers.
On the face of it, these businesses’ problems don’t seem the same. Neither do they seem connected to Ipsos’ list of what worries the world. However, SAICA ED and BEE Novation see the possibility of using the B-BBEE incentive system to make these challenges one another’s solutions. This is in line with the thinking behind the 2018 State of the Nation Address where President Cyril Ramaphosa said, “The growth of our economy will be sustained by small businesses, as is the case in many countries”, necessitating “a small business support ecosystem that assists, nourishes and promotes entrepreneurs.” Government and the business community tried forming and using this ecosystem to assist Small, Medium and Micro-Enterprises (SMME) when the pandemic hit, but they were met with the obstacles described below by SAICA ED’s Head of Projects Jameel Khan, CA (SA):
“Many SMMEs lack strong financial skills and struggle with financial literacy” especially “in the start-up and early stages of business.” This interferes with managing financials down to stabilising cash-flow. “Qualitative research shows that many SMMEs who are eligible for funding are still unable to secure the finance they need.”
The challenge this creates for established businesses’ B-BBEE compliance is that their ESD targets depend on potential beneficiary SMMEs having their “ducks in a row”. The quickest solution is as ingenious as it is true to the spirit of B-BBEE: “That funding can be channeled into initiatives run by small businesses that partner with financial services giants to assist other small businesses address their tax compliance and bookkeeping challenges,” said du Preez. “It’s natural to believe ESD beneficiaries must always be funding-ready start-ups, but there are work-arounds that allow that money to position informal traders, for example, to be eligible for Covid-19 rescue funding from government or other entities.
“When you think of the B-BBEE relief this gives to the contributor, and the business rescue options it opens up for the SMME or informal trader, as well as employment opportunities it allows those SMMEs to focus on creating for broader society, you see it as the kind of win-win-win outcome it’ll take to put the economy back on its feet. Also, inculcating financial literacy and sound financial practices in small businesses could save jobs and stabilise big businesses’ supply chains. It’s potentially a way to secure shareholders’ investments and protect profits.”
2020 second-quarter Stats SA surveys indicated that 600,000 more formal sector jobs were lost during lockdown than in the previous year. “There was a year-on-year decrease of 9,0% in earnings in the current quarter compared with June 2019, amounting to R64 billion.” That’s like every South African paying R1,092.89 at a time when the Bureau for Food and Agricultural Policy was saying a family of four would need to spend a “thrifty” R2,524.00 a month on its basic foods, and more than half of South Africa’s population would be unable to afford this. Over 85% of SMMEs at the time were ineligible for COVID-19 business relief funding.
The International Monetary Fund had observed in 2007 that in South Africa, ± 4.6% of turnover for enterprises making under R300,000 p/a went to tax compliance, tapering to 0.1% for those that made more than R6 million because “the costs of registering for VAT, for example, are likely to be largely independent of firm size”. This meant the smaller the business, the relatively heavier the burden. This fixed-cost problem was mirrored in costs of collection. “Smaller enterprises may thus find paying taxes especially burdensome, while the tax authorities are likely to find it especially unrewarding to collect it from them.” This led to revenue collection shortfalls, stifling government’s ability to support small businesses. It was a vicious cycle.
Government tried solving this problem by placing business tax liabilities on a sliding scale: in 2018, National Treasury and the South African Revenue Service reported that out of 714,422 assessed companies, 143,768 were small business corporations who paid tax at the preferential graduated income tax rate instead of the fixed corporate tax rate of 28%. Reflecting on this, Deloitte noted that “an increased amount of small businesses are making use of the preferential tax regime available to them. However, despite this progress, taxpayer education and the cost of tax compliance remains a significant challenge for SMEs, as they often simply do not have the necessary staff resources and skills to timeously and fully comply with all their tax obligations.”
But once assisted, non-compliant and informal-sector businesses could access the Employee Tax Incentive. In one instance, R30,000/m’s worth of tax incentives were returned to the SMME’s cash flow, saving six jobs and further positively impacting an average of three dependents or a total of 24 people.
Like many others, this country is beset with Covid-related policy instability. This could be better managed through the formalisation of informal businesses because it increases the corporate tax base and lays the foundation for enhanced government visibility into Covid safety compliance. This makes lockdown restriction levels easier to anticipate and, eventually, to manage.
If business-owners now struggling with larger B-BBEE compliance issues can remember facing some of the entrepreneurial challenges now faced by smaller businesses, they may help themselves now by giving smaller businesses the help they needed when their businesses were smaller.
It’s a cycle — a “business support ecosystem”, to quote President Ramaphosa, “that assists, nourishes and promotes entrepreneurs”. What could be a more concrete example of sustainable Ubuntu and ecosystemic thinking than mature businesses giving younger businesses, not a hand-out, but a hand-up?
SAICA ED is part of the Nation Building division of SAICA with a core focus of economic transformation through sustainable entrepreneurial development. They offer Financial Excellence to SMMEs through all designations of the South African Institute of Chartered Accountants (SAICA).
BEE Novation can be contacted on 060 000 2331 or info@BEEnovation.co.za for assistance implementing ED compliance initiatives.
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