What a VAT hike would mean for SMEs

As the nation waits for the rescheduled delivery of the Budget Speech on 12 March, many are wondering what tax announcements to expect.

It is especially small business owners who will be on tenterhooks as they wait to hear whether the proposed VAT rate hike (from 15% to 17%) will become a reality. 

“Never before has a Budget Speech been delayed in this manner, and it is clear that we can expect intense negotiations between now and 12 March to find agreement on the final makeup of a Budget,” Garth Rossiter, Chief Risk Officer at SME services provider Lula said.

“One of the sticking points that reportedly led to Treasury’s decision to postpone the delivery was a suggested increase of the VAT rate. Small business owners are now worried whether this hike would place even more pressure on their already tight bottom lines if it were to be confirmed. 

“Our statistics show how the turnover of small businesses over the past year has already dropped by 50%. The extra burden of an increased VAT rate is the last thing that the SME sector could afford,” he added.

The VAT rate increase was part of the government's strategy to boost revenue, fund public sector wages, and enhance infrastructure development.

In recent days there has now also been talk of a possible “wealth tax” as the public sentiment increasingly turns against an increase in the VAT rate. 

“While the VAT hike was expected to generate an additional R58 billion for the National Treasury, it also presents several challenges for small businesses that should not be underestimated,” Rossiter said.  

What a VAT increase could mean, and how to plan  

Planning for a possible increase in the VAT rate means a business owner needs to understand the implications they hold for small businesses.

Rossiter explained the implications could include: 

• Increased operational costs: Small businesses will face higher costs for goods and services. This rise in operational expenses can squeeze profit margins, especially for businesses that cannot easily pass on the additional costs to consumers.
• Pricing strategies: Business owners must decide whether to absorb a VAT increase or pass it on to customers. Absorbing the cost could reduce profit margins while passing it on might affect competitiveness and customer retention. Transparent communication with customers about price changes is crucial to maintain trust.
• Cash flow management: The VAT increase may strain cash flow, particularly for businesses with tight margins. Effective cash flow management becomes even more critical to ensure that businesses can meet their VAT obligations without compromising other financial commitments.
• Compliance and administrative burden: Updating accounting systems and ensuring compliance with the new VAT rate will require time and resources. Small businesses must ensure their invoicing, billing systems, and financial records are accurately updated to reflect the new rate. This may involve additional training for staff and potential investment in updated software.

 “To navigate the challenges posed by the VAT increase, small business owners can consider the following strategies,” Rossiter said:     

• Review and adjust pricing: Conduct a thorough analysis of how the VAT increase will impact pricing and profit margins. Consider market conditions and competitor responses when making pricing decisions.
• Enhance efficiency: Look for ways to improve operational efficiency and reduce costs. Streamlining processes and adopting cost-saving measures can help mitigate the impact of the VAT increase.
• Seek professional advice: Consult with tax advisors or financial experts to understand the full implications of the VAT increase and develop a comprehensive strategy to manage the transition.
• Communicate with customers: Keep customers informed about any price changes due to the VAT increase. Transparent communication can help maintain customer loyalty and trust.

 The Budget Speech on 12 March will have a significant impact on small business owners, whatever tax plans are announced, Rossiter added

“SMEs will be particularly interested to see if their tax contributions will be pumped back into infrastructure investments that are sorely needed. The money must be used in a constructive manner that builds the economy such as capital expenditure and healthcare, instead of footing a growing public sector wage bill. 

“The speech is an opportunity for the Treasury to show how it will fund reliable energy, transport, security, and water. Doing this creates an environment in which the private sector and SMEs can excel and create the kind of jobs and economic growth South Africa desperately needs,” he said.

BUSINESS REPORT