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Making Taxes Easy for Small Business

Sean Goss, Professional Accountant

Many economic scholars see small businesses to be the largest contributor to economic growth and employment creation on the planet. The ratio of small business to big business in different countries varies. It is predicted that small business as a collective will eclipse big business as a force in the economic landscape in future years. Be that as it may, fact remains that small business is crucial to every country’s economic development.

Limited research however, has been conducted on a variety of issues affecting small business. The global small business failure rate remains high, at an unacceptable rate of 80% (some say 95%), within the first year of formation. Common concerns about small business are confined to only cash flow problems and under capitalisation. These two are major culprits in business failures; they not the only factors. Weak marketing, skills shortages, bad management and capacity are other factors contributing to business failure. Taxes can also be added to the list as a cause of business failure.

Since many start-up businesses cannot afford to procure the services of a tax consultant/advisor, they eventually fall foul of the taxation requirements of their respective tax authorities. A small business is treated no different from a huge multinational corporation in many tax regimes around the globe. This treatment comes with its own set of problems. The one being the failure of the small business. Tax authorities vigorously pursue errant taxpayers, be they big or small. In fact, it can be proven that harsher enforcement by tax authorities are reserved for small businesses!

Governments have yet to honestly acknowledge the role of small business and stop paying only lip service to its promotion. The current tax system for small business in most countries will have to be revisited. No one is suggesting that tax authorities should grant small businesses “special treatment” forever. Just a breather, so as to enable them to grow at a faster pace.

To accommodate a small business and its growth, whilst being fair, a concept known as “thresholds tax” can be implemented for small business. It is in place for individuals, and also known as progressive taxation. Simply put, it means the more someone earns, the more they are taxed. Many countries levy a fixed percentage tax on “profits” of businesses, big or small. This tax is not fair and fairness is a prerequisite for a good tax system. Even the slightly different tax regime for “Small Business Corporations” in most countries still does not address the problem.

The controversial “profit” in business accounting, especially small business has not been thoroughly researched by tax lawmakers. Profit does not always equate to positive cash flow.

The working capital factors tied into profit, results in severe cash flow setbacks for small business. It is therefore unfair to tax the small business on profit, like the bigger companies, since bigger businesses finance their profits and/ or working capital via many methods, internal and external. These avenues are not available to smaller businesses.

Here are some suggestions on making taxes easy for small business.

Give small business a tax holiday of about two years after start-up.

• 1. Simplify tax legislation.
• 2. Tax small business only on “cash generated by operations” up to a certain threshold.
• 3.Profit less working capital (debtors and inventory on hand) plus depreciation equals cash generated by operations, which in turn becomes taxable income.
• 4. Exempt small business from employee; value added or general sales tax up to certain thresholds. (Already in place in some countries).
• 5. Taxable income thresholds could be, 0 to $200 000; $201 000 to $500 000(for small business), depending on the definition of a small business in the respective country.
• 6. As soon as the taxable income exceeds $ 500 000, a higher progressive rate applies.

Taxes on “cash” income could also fall away at this level.

My suggestions are in no way exhaustive. More substantive research is needed. If we accept that we live in a global village, taxes will also have to be harmonised and standardised, between the different countries. What International Accounting Standards have done for accounting; can be suggested for taxation also.

Sean Goss, Professional Accountant (SA), LCIBM, Registered Tax Practitioner (SA)
Website: www.sgafc.co.za

Posted on Tuesday, March 11th, 2008 at 3:50 pm and is filed under Business, Entrepreneurship, Money/Finance. You can follow any responses to this entry through the RSS 2.0 feed.