Minister of Small Business wants to coax small enterprises to comply with tax laws

By Gary Moore is a Senior Consultant at the Free Market Foundation. He was a practising attorney in Johannesburg for 30 years. He is the author of published articles and monographs about the rule of law, the legality of state action, the meaning of statutes, and laws affecting small business.By Gary Moore is a Senior Consultant at the Free Market Foundation. He was a practising attorney in Johannesburg for 30 years. He is the author of published articles and monographs about the rule of law, the legality of state action, the meaning of statutes, and laws affecting small business.

Minister of Small Business wants to coax small enterprises to comply with tax laws
This would be futile, unnecessary, and beyond her powers  

In May 2022, the Minister of Small Business Development published in the Government Gazette a notice inviting public comment on a draft Small Enterprise Development “Masterplan”. The period for comment on the draft Masterplan has now closed.

According to the Minister’s notice, the Minister intends to publish the Masterplan in the Gazette in terms of the 1996 National Small Enterprise Act, as a strategy or policy to support and develop small enterprises.

That Act defines a “small enterprise” as an owner-managed business entity carried on in any of eleven economic sectors, and having such number of employees and annual turnover as categorise it as a micro, small or medium enterprise in its sector.

Oddly, the draft Masterplan, rather than focussing on how to support or develop small enterprises, fixates on how to entice them to register as taxpayers, and thereby to become “formal”.

The Masterplan speaks of “incentivising” compliance by informal SMMEs with tax and employment administration. It is of the view that participation in the “formal economy” means being “registered for tax”, and that providing “formal employment” means “filing an IRP5 form” (employee’s tax certificate), but does not wish to “force” formalisation.

 For the Minister of Small Business Development to attempt to coax small businesses to comply with tax laws is futile, unnecessary, and beyond her powers.

Let’s start with why it is futile to attempt to coax small businesses to comply with tax laws.

The Masterplan says that consideration should be given for new approaches to enable registration that acknowledges enterprising activities of self-employed people and sole-proprietor enterprises.

The Masterplan recommends the setting up of a mechanism where sole traders and self-employed entrepreneurs can register their activities or enterprise with the Companies and Intellectual Property Commission (CIPC), not to form a company but merely as a “registration of trading in the chosen industry”.

With the greatest respect, it is naive to imagine, as the Minister appears to do, that unregistered small entrepreneurs and partnerships will flock to register with the CIPC.

Indeed, the Masterplan acknowledges that informal-economy actors may justifiably perceive the Department’s proposed registration system as a means to coerce them to pay taxes, and may consequently not take up the Department’s invitation to register.

If it comes to SARS’s attention that a small enterprise has registered as proposed by the Masterplan but is not registered for tax, SARS can register that small enterprise for tax.

The 2011 Tax Administration Act provides that, where a person that is obliged to register with SARS under a tax Act fails to do so, SARS may register the person for one or more tax types as is appropriate under the circumstances.

The only encouragements that would tempt the unregistered to register are financial incentives which are seen by SMMEs as being at least equal to the likely tax and other burdens and disadvantages that registering with the authorities would attract.

Second, attempting to coax small businesses to comply with tax laws is unnecessary.

It is unnecessary to introduce new measures to require the registration of sole-proprietor enterprises.

Tax laws already require unincorporated sole traders to register.

The South African Revenue Service (SARS) Act 1997 states that an objective of SARS is the effective collection of tax revenues and that, to achieve this objective, SARS must secure the widest possible enforcement of the tax laws, which include the Income Tax Act and the Unemployment Insurance Contributions Act.

Under the 1962 Income Tax Act, the SARS Commissioner must annually give notice of the persons who are required to furnish income-tax returns. The Commissioner’s annual notices have been requiring every natural person who during the year of assessment “carried on any trade” to submit a return.

This means that every natural person who carried on any trade, irrespective of his or her turnover, must submit an income tax return. The Income Tax Act requires every person who becomes liable to submit a return to be registered as a taxpayer.

The Masterplan aims at greater “employment administrative compliance”.

But employment legislation already requires all small employers to register. The Unemployment Insurance Contributions Act, 2002 requires an “employer” (namely “any person” who is liable to pay to any person any salary, wage or other remuneration) to apply for registration to the SARS Commissioner.

Finally, attempting to coax small businesses to comply with tax laws is beyond the powers of the Minister of Small Business Development.

The National Small Enterprise Act defines the small business Support Strategy as the policy in respect of small enterprise support as gazetted by the Minister, and includes the policy stated in the White Paper on National Strategy for the Development and Promotion of Small Business gazetted in 1995.

This means that the Minister of Small Business Development can only gazette a policy (or strategy, or Masterplan, call it what you will) for the “support”, “development” or “promotion” of small enterprise.

A policy which urges small enterprises to register as taxpayers is not a policy for the support, development or promotion of small enterprise, and cannot properly be described as one.