What VAT increase means

How small businesses will be affected and what steps to take.

Continuing the momentum generated by the recent 2018 State of the Nation address (Sona) by President Cyril Ramaphosa, which was described as a re-awakening of the national development plan, former finance minister Malusi Gigaba’s 2018 budget speech confirmed government’s commitment to creating a sustainable and empowering environment for entrepreneurs as a means to drive economic recovery and sustainable growth.

Kobus Engelbrecht, spokesperson for the 2018 Entrepreneur of the Year competition sponsored by Sanlam and BUSINESS/PARTNERS, welcomes the government’s acknowledgment of the vital role that entrepreneurs play in the development of the economy, but cautions entrepreneurs for tough times ahead.

“In both the Sona and the budget speech, government’s commitment to driving economic growth through small businesses cements our sector as a vital growth engine of the South African economy. While mostly positive, some of the announcements, however, point to increased financial strain on both consumer and business budgets.”

Engelbrecht points to a number of projects announced in both speeches, which signify positive outcomes for entrepreneurs.

“The Public Procurement Bill, which is due to be submitted for public comments next month, shows that government is committed to supporting small businesses through initiatives such as the CEO Initiative as well as new projects including a jobs summit, a youth employment service initiative and the promise to set aside 30% of all public procurement for SMMEs.

“Crucial in this respect, however, is Gigaba’s pending instruction for timely payment [within 30 days] by all government departments and public institutions,” he adds.

There was also further clarification around the R2.1 billion fund being developed between departments of small businesses and science & technology and the National Treasury to benefit small and medium enterprises during their early start-up phase, says Engelbrecht.

“While this fund will no doubt assist SMEs in accessing funding, it will not have an immediate impact, as funding distribution is only set for the beginning of the 2019/2020 financial year,” Engelbrecht adds.

Perhaps the most significant, and certainly the most immediate impact of the 2018 budget on entrepreneurs was the announcement of the one percentage point increase in value-added tax (VAT).

“While not unexpected, the VAT increase to 15% will eat away at consumers’ disposable income and invariably have a negative knock-on effect for small businesses. It is also important that all businesses adjust their accounting systems to ensure they are compliant with the new VAT rate.

“It’s vital to consider its effect on a business’ ability to pay its own debts as well.”