Original Research

Evaluation of tax preferences for SMEs: A case of small businesses in Gauteng, South Africa

Mphagahlele O. Ndlovu

Received: 06 Jan. 2025; Accepted: 17 June 2025; Published: 20 Sept. 2025

Copyright: © 2025. The Author(s). Licensee: AOSIS.
This is an Open Access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Background: Small businesses play a significant role in the alleviation of unemployment, poverty and inequality. In recognition of the key role played by small businesses, the South African government has implemented small- and medium-sized enterprises (SMEs) tax preferences to support this sector.

Aim: This study evaluated contemporary tax preferences for SMEs in South Africa.

Setting: For this study, small business owners and tax practitioners in the Gauteng province of South Africa were interviewed.

Method: The study employed a qualitative research approach. Semi-structured interviews were utilised to solicit information from 25 small business owners and 22 tax practitioners.

Results: Small business owners often lack awareness of the turnover tax regime. Tax practitioners tend to prefer the small business corporation (SBC) tax regime over the turnover tax regime because of misconceptions about the latter, its high administrative burden and the fact that the tax base for calculating tax payable is taxable turnover rather than taxable income. Many clients utilising the SBC regime have already exceeded the R1 million taxable turnover threshold. Shareholding and business activity are primary disqualifiers for SBC eligibility.

Conclusion: More educational initiatives are necessary. The shareholding requirement should be reevaluated, as it may hinder entrepreneurial activities.

Contribution: This study enhances knowledge by sharing the perceptions of small business owners who benefit from tax preferences for SMEs and the tax practitioners who assist them with compliance. As tax policies evolve with changing circumstances, it is crucial to continually evaluate whether the SBC and turnover tax regimes achieve their intended objectives. This study will aid the National Treasury and the South African Revenue Service (SARS) in this assessment.

Keywords: small business corporations (SBCs); small businesses; SME tax preferences; special tax rules; tax incentives; turnover tax regime.

Introduction

Small- and medium-sized enterprises (SMEs) constitute at least 90% of all businesses worldwide (Du Plessis 2023). Additionally, SMEs account for approximately 50% of the jobs globally (Du Plessis 2023). The importance of small businesses in the South African environment cannot be overemphasised. This is because for the longest time, South Africa has been confronted with the quintuple challenges of high unemployment rate, low economic growth, poverty, inequality and crime (Stats SA 2024a, 2024b). According to the National Planning Commission, a Department in the Presidency of the Republic of South Africa, small businesses have been earmarked as key drivers of employment, with this sector expected to generate 90% of new jobs by 2030 (National Planning Commission 2017). As it now stands, according to the Small Enterprise Development Agency (SEDA), small, medium and micro enterprises (SMMEs) employ 11.4 million individuals in South Africa (SEDA 2024). To accomplish the set ambitious target of 90%, regulatory reforms and support mechanisms must be implemented to make it easier for small businesses to develop and grow (National Planning Commission 2017).

In 2024, there was a yearly increase of 0.6% in real gross domestic product (GDP), following a 0.7% rise in 2023 (Stats SA 2024c). These growth rates are well below the targeted annual growth rate of more than 5% that is needed to be able to meaningfully reduce poverty and unemployment (National Planning Commission 2017). Several studies have highlighted the importance of SMEs in advancing economic growth (Buri, Van der Westhuizen & Heitmann 2019; Khanna et al. 2017; United Nations Development Programme 2024) and thereby reducing unemployment, poverty, inequality and crime. Oftentimes, small businesses are stimulants for radical innovations needed for economic growth (Enaifoghe & Ramsuraj 2023). Small businesses allow for stronger income redistribution, leading to a reduction in income inequality (Enaifoghe & Ramsuraj 2023).

It would appear, small businesses, although not a simple guaranteed solution for a complex problem, if well nurtured and supported, may be able to alleviate South Africa from the quintuple challenges of high unemployment rate, low economic growth, poverty, inequality and crime. Most of the income for poor individuals comes from employment; therefore, the availability of quality jobs and the ability of the poor to access good earning opportunities are key factors in reducing poverty (Hull 2009). In a multi-country analysis traversing 16 countries, Anser et al. (2020) were able to demonstrate that inequality and unemployment act as the key drivers of increased crime rates.

In recognition of the significant role played by small businesses, the South African government has set up several policies and entities to support this sector. These include, among others, SEDA, the Small Enterprise Finance Agency (SEFA), as well as the National Integrated Small Enterprise Development (NISED) Masterplan (Republic of South Africa 2022). Nevertheless, small businesses are still confronted with a multitude of challenges, such as access to funding (United Nations Development Programme 2024), a lack of financial education, infrastructure constraints, insufficient training, limited technology, crime and corruption (Mhlongo & Daya 2023). The tax system serves a dual role: at times, it assists small businesses in overcoming challenges, while at other times, it acts as an obstacle (OECD 2015).

As an instrument to support small businesses, tax compliance is substantially associated with improved access to credit facilities in developing countries (Coolidge, Ilic & Kisunko 2009). In addition, tax-compliant businesses can apply for government grants, in the form of financial and non-financial support (development of marketing tools, financial management systems, quality management systems, training, mentorship, business incubation and business advice, legal and human resources, among others) (Gauteng Enterprise Propeller 2024). Moreover, tax compliance opens opportunities for small businesses to do business with the government and its departments (Republic of South Africa 2000). As an obstacle, tax laws may be overly complex, thus making it hard for small businesses to remain tax compliant. A lack of tax knowledge among small business owners often leads to involuntary tax non-compliance (Ndlovu & Schutte 2024). Additionally, research demonstrated that tax compliance costs are regressive in nature; that is, small businesses are subjected to higher costs compared to large firms when measured as a percentage of turnover (OECD 2015).

Governments around the world often enact different tax rules that favour small businesses (OECD 2015). These special tax rules are sometimes referred to as ‘tax preferences’ or ‘tax incentives’ (OECD 2015). There are many reasons for the implementation of SME tax preferences and including, among others, the need to simplify the tax system, the necessity to assist this sector with the challenges they currently face, as well as to support the creation and growth of small businesses (OECD 2015). In this regard, the implementation of special tax rules for small businesses, in a South African context may be further justified by a special place that this sector holds in the national development plan (National Planning Commission 2017), including their expected contribution in alleviating the quintuple challenges of high unemployment rate, low economic growth, poverty, inequality and crime as discussed in this section earlier.

The aim of this study is to evaluate tax preferences for SMEs in South Africa, as informed by the perceptions derived from the lived experiences of small business owners and tax practitioners. The current study adds to the body of knowledge an updated assessment of SME tax preferences; furthermore, it adds a perspective from tax practitioners, an important stakeholder in the tax compliance journey of small businesses. Importantly, this empirical study adds to the existing body of knowledge, insights derived from the lived experiences of small business owners who are intended to benefit from tax preferences, as well as from the tax practitioners who facilitate these owners in meeting tax compliance requirements. Tax policies are inherently dynamic, adapting to evolving circumstances. Consequently, it is imperative to continuously review and evaluate whether the small business corporation (SBC) and turnover tax regimes continue to fulfil their original objectives and operate as initially intended. This study will assist the National Treasury and South African Revenue Service (SARS) in making this judgement call.

The remainder of this study is structured in the following manner: firstly, the researcher reviews the existing literature on tax preferences for SMEs. Secondly, a description of the research design and methodology employed to evaluate the tax preferences of SMEs in South Africa is provided. Thirdly, the findings are discussed. Fourthly, the article presents the study’s limitations, concluding remarks and recommendations for policy, practice and future research.

Literature review

There is no universal definition of what constitutes a small business in South Africa. The National Planning Commission categorises small businesses into three categories, namely: survivalist, lifestyle and entrepreneurial businesses. Survivalist businesses are typically home-based or operating on the streets, for example, spaza shops, taverns, hawkers, taxi operators, etc. (National Planning Commission 2017). Lifestyle businesses are also home based, usually in upper or middle suburbs or businesses with one office, for example, electricians, plumbers, accountants, doctors, a small production plant, etc. (National Planning Commission 2017). In turn, entrepreneurial businesses are focused on innovation, growth, developing new products and markets and job creation (National Planning Commission 2017).

On the other hand, section 1(1) of the Income Tax Act defines ‘small, medium or micro-sized enterprise’ as:

(a) any person that qualifies as a micro business as defined in paragraph 1 of the Sixth Schedule; or

(b) any person that is a small business corporation as defined in section 12E(4). (Republic of South Africa 1962:n.p.)

In its simplest form, a ‘micro business’ includes businesses with a qualifying turnover of up R1 million while a SBC includes businesses that generate gross income of up to R20m during a year of assessment, among an extensive list of qualification criteria (Republic of South Africa 1962: Section 12E(4)(a)(i); Schedule 6 paragraph 1). Lastly, the revised schedule 1 of the National Small Enterprise Act defines a ‘small business’ using two metrics, that is, the total full-time equivalent of paid employees and total annual turnover (Republic of South Africa 1996). Depending on the industry, the maximum revenue for small or ‘micro businesses’ can vary between R5m and R75m (Republic of South Africa 1996: Schedule 1). Although reference will be made to the ‘small business’ definition provided for by the National Planning Commission, the ‘small, medium or micro-sized enterprise’ definition stipulated in the Income Tax Act will be adopted because the aim of this study is to evaluate tax preferences for SMEs in South Africa.

The special taxation regimes aimed at small businesses take many forms, such as extra deductions, accelerated capital allowances on movable assets, reduced tax rates, exemptions from certain taxes, as well as presumptive (defined in detail in this section) taxes (OECD 2015). In South Africa, small businesses, provided they meet certain requirements, have a choice to be taxed under special tax regimes that differ from the standard corporate income tax rules. The two special tax regimes that will be the focal point of this study include the turnover tax regime as well as the SBC tax regime.

The turnover tax regime was announced by the then Minister of Finance, Trevor Manuel, to be effective for the year of assessments commencing on 01 March 2009 (National Treasury 2008). The turnover tax regime is targeted at sole proprietors, partnerships, close corporations, companies and co-operatives with a qualifying turnover of R1m or less during a year of assessment, among other requirements (Republic of South Africa 1962: Schedule 6). The turnover tax is a simplified tax regime that is intended to make it easier for ‘micro businesses’ to comply with their tax obligations (SARS 2022). It is a simplified tax regime because tax is calculated based on taxable turnover, thus nullifying the requirement to keep and retain records of expenditure from a tax compliance perspective. The only records required to be kept for a period of 5 years by a ‘micro business’ registered on the turnover tax regime include records of all amounts received, dividends declared, a list of assets with a cost price of more than R10 000, as well as each liability that exceeds R10 000 at the end of each year of assessment (Republic of South Africa 1962: Schedule 6 Paragraph 14; SARS 2022).

Regarding employees’ tax, ‘micro businesses’ registered on the turnover tax regime have an option to file employees’ tax returns biannually instead of monthly (Republic of South Africa 1962: Sixth schedule paragraph 11(4A)). Employees’ tax is the tax that employers are obligated to withhold from the salary or wages paid to or payable to their employees (Republic of South Africa 1962: Fourth Schedule). Moreover, a ‘micro businesses’ with a taxable turnover of R335 000 or less pay no tax, the maximum amount of tax payable for a ‘micro business’ with a taxable turnover of R1m is R14 150 for the years of assessment that end on any date between 01 March 2024 and 28 February 2025 (National Treasury 2024). The turnover tax regime does not provide relief regarding employees’ tax liability (SARS 2022). In summary, the key benefits associated with the turnover tax are fourfold: reduced bookkeeping requirements, reduced admin burden, tax savings and a simplified tax calculation.

The turnover tax is a presumptive tax that is targeted at survival businesses. This is because ‘micro businesses’ do not usually keep a full record of transactions, use cash and often do not embrace voluntary tax compliance (Mas-Montserrat et al. 2023). A presumptive tax regime refers to a simplified tax regime (Bird & Wallace 2004), such as the turnover tax regime. The term ‘presumptive’ serves to convey the notion that there exists a legal presumption suggesting the taxpayer’s tax base is not less than the figure derived through the implementation of the indirect method (Bongwa 2009; Bucci 2020). According to Ahmad and Stern (1991):

[T]he term presumptive taxation covers a number of procedures under which the ‘desired’ base for taxation (direct or indirect) is not itself measured, but is inferred from some simple indicators which are easily measured than the base itself. (p. 276)

The turnover tax regime may be viewed as a lure to attract survival businesses to register as taxpayers, and it is intended to be transitionary or temporary in nature. The presumptive tax regime should be structured in such a manner that it facilitates the gradual transition of ‘micro businesses’ into the standard corporate income tax regime over time (Mas-Montserrat et al. 2023). Furthermore, it is imperative to incorporate incentives that encourage ‘micro businesses’ to shift from the turnover tax regime to the standard corporate income tax regime, such as loss carry forward opportunities (Mas-Montserrat et al. 2023). The notion of the transitional nature of the turnover tax in South Africa is accentuated by the fact that the maximum qualifying turnover of R1m has remained constant for the past 17 years, with no adjustment for inflation. The transitionary nature of the turnover tax regime in South Africa is further demonstrated by the design characteristics wherein tax is calculated on a sliding scale with the rate of tax increasing as the taxable turnover grows (that is 0% at a taxable turnover of R335 000.00 or less and growing to 3% for a taxable turnover above R750 000.00). While some countries, such as Tunisia and Mexico, set out the maximum number of years that businesses may be taxed under the presumptive taxes (Bird & Wallace 2004; Bucci 2020; OECD 2024), South Africa does not. There are disadvantages to not prescribing the maximum number of years that businesses may be taxed under the presumptive taxes, such as the phenomenon of bunching effects and artificial closing and reopening of businesses (Mas-Montserrat et al. 2023). South Africa may need to consider prescribing the maximum number of years in which ‘micro businesses’ can be allowed to be taxed under the turnover tax regime.

The aim of a presumptive tax is not only to generate more revenue for the state but also to attract informal businesses to register for taxes (Bucci 2020). In this regard, the success and the effectiveness of the turnover tax regime, as a presumptive tax, cannot be measured solely by the amount of tax revenue that is generated from the regime. However, the success ought also to be measured, firstly, by the extent to which small businesses that would ordinarily not register as taxpayers did so and secondly, by the number of small businesses that transitioned from the turnover tax regime to the standard corporate income tax regime since the inception of the turnover tax regime.

On the other hand, the SBC tax regime was introduced in 2001 and offers a graduated corporate tax rate and accelerated capital allowances to qualifying small businesses (National Treasury 2001). The incentive is available to incorporated businesses in the form of close corporation, co-operative, private company and personal liability company as contemplated in section 8(2)(c) of the Companies Act in South Africa (Republic of South Africa 1962:Section 12E(4); 2008). Under the SBC regime, a qualifying small business pays no tax if its taxable income does not exceed R95 750.00 for the years of assessment that end on any date between 01 April 2024 and 31 March 2025 (National Treasury 2024). Beyond the taxable income level of R95 750.00, sliding scales apply up to R550 000.00, and at this level of taxable income, the tax payable is R57 698.00 (National Treasury 2024). Beyond the taxable income level of R550 000.00, the standard tax rate of 27% applies (National Treasury 2024). Regarding accelerated capital allowances, qualifying small businesses that purchase assets for use in the manufacturing process may claim 100% capital allowances on the cost of these assets in the assessment year in which they are brought into use. Other assets may qualify for allowances of 50%, 30% and 20% in the first, second and third years, respectively, after they are brought into use (Republic of South Africa 1962: Section 12E(1),12(1A)).

The Davis Tax Committee (2014) argued that the SBC tax regime is cumbersome and expensive to administer. The committee further alluded to several concerns regarding the SBC tax regime. Firstly, tax practitioners are overly recommending the SBC incentive in the interest of fees (Davis Tax Committee 2014). Secondly, in its current form, the regime is benefiting established, profitable and niche businesses, which were not the specific target (Davis Tax Committee 2014). The initial intention of the SBC regime was to benefit small labour-intensive businesses primarily in the manufacturing and tourism sectors (National Treasury 2000). The committee recommended that the regime be replaced with some form of a refundable tax compliance rebate, a tax incentive that will subsidise tax compliance costs incurred by small businesses to remain tax compliant (Davis Tax Committee 2014).

As might be expected, there are some anti-avoidance provisions linked to both the turnover tax regime and the SBC tax regime. Key among these include the shareholding requirement, whereby, only natural persons may be shareholders of the qualifying business as well as that those shareholders may not have multiple shareholdings (with exceptions such as unit trusts among others) (Republic of South Africa 1962: Section 12E(4)(a)(ii), sixth schedule paragraph 3 & 4). Furthermore, a small business will not qualify for the incentive if more than 20% of the total of all receipts and accruals (excluding capital receipts) and capital gains are made up of investment income as well as income from the rendering of a personal service (with exceptions such as the ‘escape hatch’ described in the section ‘Tax practitioners’ concerns regarding shareholding and business activity requirements’) (Republic of South Africa 1962: Section 12E(4)(a)(iii), sixth schedule paragraph 3 & 4).

In his study, Lindeque (2011) found that small businesses that registered for the turnover tax regime were able to reduce their tax compliance costs. This is because these small business owners opted to submit their own tax returns instead of using the costly services of tax practitioners (Lindeque 2011). In this regard, Lindeque (2011) argued that the ‘micro business’ owners expressed a positive attitude towards the turnover tax regime, while the tax practitioners did not. A study conducted in the North-West province of South Africa found that small business owners did not have adequate knowledge of the turnover tax regime to enable them to register for it (Schutte et al. 2019). Hellberg (2019) also found that the participants were not aware of the turnover tax legislation and lacked an understanding of key aspects of the turnover tax regime. Naicker and Rajaram (2019) also found that half of the participants were not aware of tax relief measures for small businesses. None of the participants in the study conducted by Naicker and Rajaram (2019) had adopted the turnover tax regime; only the SBC tax regime was utilised by some of the participants. Viviers and Groenewald (2019) conducted an analysis of the turnover tax regime and argued that while it may seem appealing, it is important for taxpayers to recognise that registered ‘micro businesses’ must still comply with several administrative requirements.

These studies provided an important overview of the SME tax preferences, together with key challenges and successes pertaining to these tax incentives, in South Africa. Considering the vital role of small businesses in the alleviation of key challenges facing South Africa, it is crucial to constantly evaluate the SME tax preferences in order to ascertain whether the government is making progress in addressing challenges and shortfalls raised by researchers in the past. Additionally, approximately 68% of SMMEs in South Africa operate in the informal economy (SEDA 2024). The turnover tax regime is particularly suited to lure these informal sector traders into the formal economy, thus making it important to constantly evaluate its effectiveness. The current study adds to the body of knowledge an updated assessment of SME tax preferences. Furthermore, it adds a perspective from tax practitioners, an important stakeholder in the tax compliance journey of small businesses. Tax policies are inherently dynamic, adapting to evolving circumstances; consequently, it is imperative to continuously review and evaluate whether the SBC and turnover tax regimes continue to fulfil their original objectives and operate as initially designed. This study, therefore, will assist the National Treasury and SARS in conducting this evaluation.

According to Smith (1776), taxation must adhere to the following principles: equity, certainty, convenience and efficiency. The current study is underpinned by the tax maxims developed by Smith (1776). Citizens should contribute towards taxes according to their abilities, based on the revenue they earn under the protection of the government (Smith 1776). The burden of taxation must be borne by all in proportion to their means (Ricardo 2005). Tax preferences for SMEs enable the implementation of distinct tax regulations for businesses of varying sizes, differentiating between small and large businesses. The SBC regime and the turnover tax regime promote equity as they enable small businesses to pay tax at progressive rates that are much lower compared to the standard rate of 27% paid by larger businesses.

According to Smith (1776:87), ‘every tax ought to be levied at the time, or in the manner in which it is most likely convenient for the contributor to pay it’. This maxim advocates, among others, for a simplified tax regime. One of the objectives of the turnover tax regime is to make it easier for ‘micro businesses’ to be tax compliant (SARS 2022). Furthermore:

[E]very tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state. (Smith 1776:87)

This maxim advocates that tax collection costs incurred by tax administrators and tax compliance costs incurred by taxpayers must be kept at a minimum. For example, the turnover tax regime reduces the costs associated with tax compliance by alleviating the requirement for ‘micro businesses’ to maintain comprehensive records of expenditure (Viviers & Groenewald 2019). Lastly, ‘tax which each individual is bound to pay ought to be certain, and not arbitrary’ (Smith 1776:87). The SBC and the turnover tax regime are codified in section 12E and the sixth schedule of the Income Tax Act (Republic of South Africa 1962), as such the time, manner and quantity of payment are clear to the taxpayer.

Methods

The study adopted a qualitative research methodology. Firstly, the study focused on small business owners in the Gauteng province of South Africa, who have a gross income not exceeding R20m during a year of assessment. Secondly, the target population included tax practitioners who service small businesses that have a gross income of up to R20m during a year of assessment situated in different parts of the Gauteng province of South Africa. The threshold of R20m is derived from the definition of a ‘small, medium or micro-sized enterprise’ as stated in the Income Tax Act (Republic of South Africa 1962). About 32% of all SMMEs are based in Gauteng, which makes it the province with the largest concentration of SMMEs compared to the other eight provinces in South Africa (SEDA 2024).

A total of 22 tax practitioners and 25 small business owners were interviewed to solicit comprehensive information regarding the enacted tax preferences for small businesses in South Africa. Glaser and Strauss (1967) recommend that sample sizes should be guided by the concept of saturation. Sample sizes for a qualitative study of lived experiences such as this one often range between 6 and 10 participants (Haase 1987; Morse 1994). In the current study, new meanings and rich data were revealed even subsequent to the initial 10 interviews conducted with both the small business owners and the tax practitioners. Recurring patterns in responses became noticeable after the initial 20 and 22 interviews with the tax practitioners and small business owners, respectively. Following this, the researcher resolved to cease the interview process after conducting the first 22 interviews with the tax practitioners and 25 with the small business owners, as no new meanings were forthcoming and undertaking additional interviews did not enrich the study.

The researcher opted for semi-structured interviews to allow the participants to use their own words to explain their perspectives and experiences in their encounter, or lack thereof, of the SME tax preferences. The aim of the current study is to evaluate contemporary tax preferences for SMEs in South Africa; this undertaking entails an in-depth analysis of a tax compliance phenomenon within its real-life setting, using interviews. Therefore, the selection of a qualitative research methodology employing a case study approach is justified. This is because case study research is appropriate when a contemporary phenomenon is to be investigated (Patnaik & Pandey 2019). In addition, case study research is a method of inquiry that emphasises the pursuit of meaning and understanding (Merriam & Tisdell 2016).

Purposive sampling technique was used to select 25 small business owners who operate their businesses in the Gauteng province of South Africa, registered for tax and with a gross income of R20m or less during a year of assessment. The R20m gross income threshold was selected because SME tax preferences are the focal point of this study. These SME tax preferences may only benefit ‘micro businesses’ with a qualifying turnover limit of R1m as well as SBCs with a gross income of up to R20m during a year of assessment.

The purposive sampling technique was used again to select 22 tax practitioners who serve small businesses in Gauteng with a gross income of up to R20m. These tax practitioners were strategically chosen to be part of the study’s population because many small businesses outsource their tax compliance functions to them (Coolidge et al. 2009), making them well positioned to provide a comprehensive account of SME tax preferences. In evaluating existing SME tax preferences, it was imperative for the researcher to purposefully select participants who possessed lived experiences of the phenomenon under investigation. This purposeful selection would enable the participants to recall and provide an accurate account of the phenomenon. As a result, the purposive sampling technique was deemed suitable because, given the aim of this study, specific participants who hold important views on the phenomenon under consideration needed to be incorporated in the sample (Campbell et al. 2020).

The following questions were posed to the small business owners:

• Would you consider it easy for small businesses to comply with the South African tax regime? Why?
• Are you aware of any government initiatives put in place to assist small business owners with tax compliance? What are these?
• What may be the reasons behind the lack of awareness, if any?
• What can SARS do to improve the level of awareness of these government initiatives?
• Have you considered registering on the turnover tax regime?
• Would you encourage other small businesses (with a turnover of < R1m) to register on the turnover tax regime? Why?
• Have you considered making use of section 12E provisions of the Income Tax Act?

The following questions were posed to the tax practitioners regarding SME tax preferences:

• Would you consider it easy for small businesses to comply with the South African tax regime? and WHY?
• Are there any measures that SARS can put in place to make it easier for small businesses to be able to comply? What measures would you suggest?
• Are you aware of any government initiatives put in place to assist small business owners with tax compliance? What are these?
• Are your clients (especially small businesses) aware of any government initiatives put in place to assist them with tax compliance?
• What may be the reasons behind the lack of awareness, if any?
• What can SARS do to improve the level of awareness of these government initiatives?
• Have your clients considered registering for the turnover tax regime?
• Would you encourage your clients (with a turnover of < R1m) to register on the turnover tax regime? and why?
• Are your clients making use of section 12E provisions of the Income Tax Act?

Thematic analysis was utilised to analyse the responses of the participants. The researcher selected thematic analysis as it is a suitable analysis approach when one seeks to comprehend experiences through a set of data (Braun & Clarke 2012). The thematic analysis enabled the researcher to search for shared meanings (Kiger & Varpio 2020). The thematic analysis process entailed the preparation of the data, ensuring that the researcher is familiar with the data by repeatedly reading the interview transcripts, coding the data, looking for themes in the coded data and reporting on the themes.

The findings of this study were thematically presented in accordance with the guidelines established by Max van Manen (Chagadama 2018; Van Manen 1990). The analysis process adhered to a four phased approach as follows: phase 1, elucidation of thematic elements, which involved the comprehensive preparation of the interview transcript to ensure accuracy; phase 2, isolating thematic statements that entailed the assignment of codes through both holistic and line-by-line coding, employing an inductive approach to ensure the data speak for itself and effectively amplifies the voices of the participants; phases 3 and 4 composing linguistic transformations and gleaning thematic descriptions, respectively (Ritruechai et al. 2018). Composing linguistic transformations and gleaning thematic descriptions entailed the development of themes from the initial cycle of coding through continuous dialogue and engagement, whereby these codes were systematically reorganised and restructured to generate categories (Ritruechai et al. 2018). These categories were then subsequently aggregated to form sub-themes, which ultimately led to the emergence of the themes (Ritruechai et al. 2018). This process of analysis produced four themes as described in the ‘Results’ section.

Ethical considerations

Ethical clearance to conduct this research was obtained on 20 March 2020 from the North-West University’s Economic and Management Sciences Research Ethics Committee (EMS-REC) (ref. no.: NWU-00616-20-A4). Written and verbal informed consent was acquired from all participants. The participants were assured of anonymity prior to the commencement of the interviews. Furthermore, the participants were advised that they can opt not to participate or may terminate their participation at any point without providing any reasons and with no consequences.

Results

The data analysis process resulted in four themes, namely: the standard corporate income tax regime is complex for small business owners, small business owners lack awareness of SME tax preferences, tax practitioners prefer the SBC tax regime over the turnover tax regime and tax practitioners’ concerns regarding the stringent shareholding and business activity requirements. Each of these themes will be discussed in detail in this section. Appendix 1 (Table 1-A1 and Table 2-A2) contains detailed demographic information about the participants.

The standard corporate income tax regime is complex for small business owners

Out of the 25 small business owners, 13 (that is 52%) stated that it is not easy for them to comply with the standard corporate income tax regime, because of, among others, a lack of tax knowledge:

‘You know, honestly speaking what makes it easy is if you have an accountant working hand in hand with you that makes it easy, easy. But if I did not have an accountant it was going to be almost impossible.’ [sic] (Small business owner 4, male, matric)

The tax practitioners affirmed the complexity of the standard corporate income tax regime as far as small business owners are concerned. Out of the 22 tax practitioners, 13 (that is 59%) alluded to the notion that it is not easy for small businesses to comply with the standard corporate income tax regime. These tax practitioners made reference to a number of reasons to support their assertions, such as high administrative burden, tax compliance costs, lack of tax knowledge, stretched resources and complex tax laws among others:

‘… [F]or my micro enterprises, small businesses alike we have got a very elaborate tax system, and it is very admin intensive for small businesses and micro enterprises to comply. And it is expensive for them to comply …’ [sic] (Tax practitioner 6, female, SAIPA)

‘[P]eople running small businesses are quite stretched resource-wise. And tax along with many other compliance requirements you know kind of become, you know get put at the back because you try to make money, you try to survive. So, from a time perspective it is actually not easy for them to comply. From an administrative perspective it is also not easy for them to comply, maintaining documents …’ [sic] (Tax practitioner 11, female, SAICA)

‘I find it very challenging; you will find that the small businesses that I deal with they lack tax knowledge. The lack of tax knowledge, what they just know is that when they register a company for them to tender or to get awarded [a tender], they need to have a tax clearance.’ [sic] (Tax practitioner 15, female, SAICA)

In a South African context, SME tax preferences are arguably justified by the importance of small businesses in alleviating the quintuple challenges of high unemployment rate, low economic growth, poverty, inequality and crime as discussed in the Introduction. Studies have demonstrated that tax compliance costs are regressive in nature, with smaller businesses facing a disproportionately larger burden (Matarirano, Chiloane-Tsoka & Makina 2019). Additionally, tax compliance costs are higher for newer businesses (Hasseldine et al. 2012; Smulders & Stiglingh 2008). In this regard, SME tax preferences are further justified by the challenges experienced by small business owners when it comes to tax compliance.

Not implementing special tax rules may disadvantage small businesses against their larger competitors, which may inherently lead to distortions in business decisions (OECD 2015). Before any tax preference may be introduced, the government must clearly identify the problem they wish to tackle and the category of small businesses they wish to target (OECD 2015). In this regard, the turnover tax regime is a presumptive tax that was introduced to alleviate the burden linked to tax compliance (National Treasury 2008; Viviers & Groenewald 2019). The aim of the turnover tax regime is to make it easier for the very smallest businesses to comply by negating the need to undertake complex tax calculations as well as record-keeping challenges that small businesses encounter daily (National Treasury 2008; Ndlovu & Schutte 2024).

Small business owners lack awareness of small- and medium-sized enterprises’ tax preferences

During the engagements with the small business owners, it was evident that they lacked awareness of the special tax regimes put in place to alleviate the tax compliance burden. Out of the 25 small business owners, 9 (that is 36%) stated that they have not heard of the turnover tax regime:

‘But the thing is they do not inform, they do not educate about these things. Probably I am on that SBC thing, but I am not sure.’ [sic] (Small business owner 8, male, post matric)

Additionally, 10 of the tax practitioners (that is 45%) affirmed that small business owners are not aware of the special tax regimes, in the form of the turnover tax regime and SBC tax regimes:

‘I do not think it is a lack of interest because I think people are very interested in qualifying to pay less tax. I think it is more of an information from SARS’s [South African Revenue Service] side that is lacking a little bit … I do not think people are going to go looking how can I pay less tax, they know they need to pay tax, but they do not know the different vehicles they can use to reduce their tax legally you know like within there is certain things that they can apply to qualify for less tax. And they are not aware of that.’ [sic] (Tax practitioner 7, Female, SAIPA)

The findings of this study are aligned with those of Labuschagne (2018), who found that none of the participants who qualified for the turnover tax regime registered for it, mainly because of a lack of sufficient information to enable them to apply for it. The ongoing absence of awareness is alarming, particularly given that the regime has been in place for over 16 years. More awareness and education are needed, especially among the informal traders. As previously mentioned, the turnover tax regime is a transitional measure and may be used as a bait to attract small businesses that would ordinarily not register for tax for reasons such as lack of tax knowledge, high administrative burden and large tax payments.

Tax practitioners prefer the small business corporation tax regime over the turnover tax regime

More than half of the tax practitioners interviewed, specifically 13 out of 22 (that is 59%), staunchly preferred the SBC tax regime over the turnover tax regime. Several reasons were put forward for this preference. Firstly, the tax practitioners still do not have a full understanding of how the turnover tax regime works. This finding is not surprising as many tax practitioners have been trained first as accountants. The turnover tax regime often does not form part of the curricula of major accounting professional bodies such as the South African Institute of Chartered Accountants (SAICA 2025) and others:

‘You know to be honest with you I have not really focused too much in to knowing how it will apply to their businesses and what it affects from me to actually provide that as a service, as an additional service. That is the only reason.’ [sic] (Tax practitioner 20, female, SAICA)

Secondly, the tax practitioners prefer SBC over the turnover tax regime because of the fact that the tax base for calculating the tax payable under the SBC is taxable income, unlike the taxable turnover used in the turnover tax regime. Because the turnover tax regime bases the tax payable on taxable turnover rather than taxable income, small businesses might have to pay taxes even if they incur losses. This assertion by the tax practitioners is supported by Viviers and Groenewald (2019), who argued that ‘micro businesses’ must assess the benefits of registering for turnover tax, as under this regime, losses are not recognised, as tax is calculated on taxable turnover instead of taxable income. Additionally, small business owners are not able to take advantage of the relief contained in section 20 of the Income Tax Act, wherein taxpayers are able to set off assessed losses against future taxable income (Republic of South Africa 1962: Section 20; SAIT 2014):

‘… This turnover tax is a total waste of time I do not know why SARS is trying to continue with that…the small business tax I would say at least 54% of my companies and CC’s is on that tax [SBC tax regime] and that is definitely very helpful to get a small business up and running because you all know a small business do not make profit within the first week or five years. So, when they do start making profit and they qualify as a small business it really helps them to grow.’ [sic] (Tax practitioner 17, female, SAIT)

‘No, we do not [recommend turnover tax regime] because most of my clients have a lot of stuff that they buy in also so that actually does not make it worth their while because of the turnover tax you only pay tax on the turnover. My clients have a lot of expenses, so when you work it out it is better for them just to do it the normal way.’ [sic] (Tax practitioner 5, female, SAIBA)

Thirdly, the tax practitioners prefer SBC over the turnover tax regime because of the perception that the administrative burden of the turnover tax regime is cumbersome:

‘[T]he turnover [turnover tax regime] if I am not mistaken it is a lot of admin to basically work out this month’s turnover and pay tax on this turnover and once you are at a certain amount most of the clients we do not advise going to turnover tax …’ [sic] (Tax practitioner 14, male, SAIT)

‘I find it a bit cumbersome to work with in terms of going to branches, you do not have information available on e-filing. I find it is easier to maybe try and qualify for a small business tax and things like that. Yes, it is basically just access to the information being able to submit information easily that makes me not so keen to advise clients to try it … It makes it very difficult to work with. We have got technology available to us why can’t they add this system on it as well. I think a lot more people will use it if it was available in this manner.’ [sic] (Tax practitioner 7, female, SAIPA)

Fourthly, many tax practitioners’ small business clients are on the SBC tax regime instead of the turnover tax regime because these clients have already exceeded the taxable turnover threshold of R1m for a year of assessment:

‘[M]ost of my clients they do not meet the requirement of less than one million …’ [sic] (Tax practitioner 9, male, SAICA)

‘[T]urnover tax is easier but obviously that is only if you are below a million which I think the bulk of our clients are over a million in any case. They do not qualify for that …’ [sic] (Tax practitioner 10, male, SAICA)

The fact that many of the tax practitioners’ clients are on the SBC regime and not the turnover tax regime is not entirely surprising. This is because the aim of the turnover tax regime is to make it easy to comply, such that the very small businesses must be able to comply with the turnover tax regime without the assistance of a tax practitioner. Importantly, the turnover tax regime is not aimed at small businesses that can maintain a full set of accounting records; hence, it is a presumptive tax. In this regard, tax practitioners choosing the SBC tax regime because turnover tax is based on taxable turnover, not taxable income, as in SBC, should not render the turnover tax regime ineffective or undesirable.

The rationale presented by the tax practitioners in favour of their preferences for the SBC regime is distinct from the assertion made by the Davis Tax Committee (2014), which suggested that tax practitioners are overly recommending the SBC incentive primarily for fee-related purposes. The selection of the SBC regime is influenced by a multiplicity of factors beyond merely the consideration of fees.

Tax practitioners’ concerns regarding shareholding and business activity requirements

Out of the 22 tax practitioners, 10 (that is 45%) raised concerns regarding the holder of shares requirement for the SBC tax regime. As an anti-avoidance measure, the SBC tax regime is not available if the owner of the small business also holds shares or interest in the equity of any other company, except those specifically permitted in terms of section 12E(4)(a)(ii)(aa) to (ii) of the Income Tax Act (Republic of South Africa 1962). This anti-avoidance measure is aimed at preventing small business owners from splitting income across a number of SBCs (SARS 2018). According to the tax practitioners, the shareholding requirement prohibits many small businesses from qualifying for the SBC tax regime:

‘[T]hey are entrepreneurs so they do not just start one business at a time they would start multiple businesses, or they can have multiple businesses, they are not looking to evade tax they just want to be compliant because the definitions are so narrow it makes it difficult for them to comply with the tax legislation.’ [sic] (Tax practitioner 1, male, SAICA)

There are exceptions to the shareholding requirement. If the other business in which the owner holds equity has not carried on a trade or owned assets with a market value exceeding R5 000.00 during any year of assessment, the disqualification shall not apply (Republic of South Africa 1962: Section 12E(4)(a)(ii)(hh)). Many of the tax practitioners did not mention this exception; it may be that they are not aware of it. Nonetheless, tax practitioners and small business owners alike need to be constantly reminded about the qualification criteria in their totality, especially the exceptions:

‘So, but you see within that criteria that we talk about are you a shareholder of only one enterprise. Maybe the other one is dormant, but I am a shareholder there. So I think they should really look at that criteria so that it is practical because I am saying for example myself, I am a small business and I am registered, I registered three companies trying to say this one is going to do this and this one is going to do this but all of them, two maybe three they have a zero turnover. There is nothing going on but that criteria on its own if I have to apply it, it can throw you out of the SBC.’ [sic] (Tax practitioner 4, female, SAICA)

Over and above the holder of share requirement, some aspects of the business activity requirement prohibit many small businesses from qualifying for the SBC tax regime. According to section12E(4)(a)(iii) of the Income Tax Act, a small business will not qualify for the SBC tax regime if more than 20% of the total of all receipts and accruals (excluding capital receipts) and capital gains, comprises investment income and income from the rendering of a ‘personal service’ (Republic of South Africa 1962). Out of the 22 tax practitioners, 11 (that is 50%) noted that the business activity requirement disqualifies many small businesses from the utilisation of the SBC tax regime:

‘[A] lot of our clients are professional services. So, it also disqualifies them there. So, it is a tough criteria [criterion] to comply with …’ [sic] (Tax practitioner 10, male, SAICA)

‘I told you that the bulk of my clients they are professionals, they are attorneys and advocates, and you will find that they do not qualify for small business tax because they are not regarded as a qualifying industry. Like with all the professionals they are not regarded, you cannot make them small business. So small business taxes when you have a look at it is aimed at companies which are having more than three employees.’ [sic] (Tax practitioner 15, female, SAICA)

There is, however, an ‘escape hatch’ for the ‘personal service’ requirement. Section 12E(4)(d) of the Income Tax Act states that the personal service requirement does not apply to entities that, throughout the year of assessment, employ three or more employees who are on a full-time basis engaged in the business of rendering that service (Republic of South Africa 1962). These employees may not be holders of shares or connected persons in relation to a holder of a share in the business (Republic of South Africa 1962: Section 12E(4)(d)). Greater recognition of this ‘escape hatch’ is needed to enable more entities to utilise the SBC regime.

The SBC tax regime is targeted at manufacturing businesses, considering the generous section 12E 100% allowance on manufacturing assets (Republic of South Africa 1962: Section 12E). Many of the businesses that are excluded are what the National Planning Commission refers to as lifestyle businesses. These may be home based, usually in upper or middle suburbs or businesses with one office (National Planning Commission 2017). Tax practitioner 17 also noted that this requirement is not unreasonable, as many of these ‘lifestyle’ businesses are able to earn big money right from the start:

‘Look when it comes to personal service providers like your architects and whatever yes for them obviously, they might feel that it is not fair, but that type of industry is normally you’re very highly educated, your doctors, your advocates. So, I personally do not feel that they, it should not be a problem for them to go and start paying tax at a 28%[27%] from the word go … I really think that the personal services is normally as I have said your very high [sic] qualified people that will earn big money from the word go so I think that is why they are excluded.’ [sic] (Tax practitioner 7, female, SAIPA)

More education is needed around the holders of shares and business activity requirements. There are exceptions to these strict requirements, and with proper guidance, small businesses may be able to make decisions that will allow them to overcome these limitations. Firstly, these exceptions include, among others, the fact that the personal service requirement does not apply to entities that employ three or more full-time employees who are fully engaged in the business throughout the year of assessment (Republic of South Africa 1962: Section 12E(4)(d)). Secondly, if the other business in which the owner holds equity has not, during any year of assessment, carried on a trade and owned assets with market value in excess of R5 000, the shareholding disqualification shall not apply (Republic of South Africa 1962: Section 12E(4)(a)(ii)(hh)).

Conclusion

This study evaluated SME tax preferences from the perspectives of small business owners and tax practitioners, drawing on their lived experiences. The findings indicate that small business owners remain largely unaware of the turnover tax regime, which is particularly concerning given that this regime was established over 16 years ago. The extant literature suggests that there are various advantages associated with the turnover tax regime, including diminished bookkeeping obligations, reduced administrative burden, tax savings and a simplified tax calculation process. At the same time, the literature advises caution by highlighting that despite the turnover tax regime’s attractive features, there are still numerous administrative requirements that must be observed. The lack of awareness of SME preferences was raised repeatedly by different researchers in the past. The SARS is implored to engage in aggressive awareness campaigns to ensure that small business owners become aware of these special tax rules. The informal sector businesses must be made aware of the turnover tax regime as it can act as a bait to encourage formalisation.

The findings of this study further revealed that tax practitioners staunchly prefer the SBC tax regime over the turnover tax regime. There are four reasons for this preference: (i)some tax practitioners lack a full understanding of the turnover tax regime; (ii) the tax base for calculating tax payable is taxable turnover and not taxable income, resulting in taxes payable in a loss-making situation; (iii) inability to carry forward losses; and (iv) the perceived administrative burden. This study advocates for the incorporation of the turnover tax regime into the curricula of accounting professional bodies to facilitate understanding of the regime by tax practitioners. This finding contradicts the assertion of the Davis Tax Committee (2014), which suggested that tax practitioners are excessively advocating for the SBC incentive primarily in the interest of fees.

Several small business clients of tax practitioners are subject to the SBC tax regime rather than the turnover tax regime, as these clients have already surpassed the qualifying turnover threshold of R1m. Consequently, the tax practitioners further noted that they are not better positioned to provide advice to their clients regarding the turnover tax regime because, in numerous cases, potential clients consult them only after they have surpassed the R1m threshold. This is, however, not concerning as the intention of the turnover tax regime is to simplify the tax system so that small businesses may be able to be tax compliant without the assistance of tax practitioners. However, it remains important for tax practitioners to have an understanding of the turnover tax regime in order to provide counsel to clients, notwithstanding their limited number.

The findings of this study indicate that shareholding and business activity requirements are key reasons small businesses are disqualified from using the SBC tax incentive. However, there are provisions related to these requirements that, if planned accordingly, may still allow small businesses to utilise the SBC regime. Specifically, the ‘escape hatch’ provision states that if the other business in which the owner holds equity has not engaged in trade or owned assets with a market value exceeding R5 000 during any year of assessment, the disqualification will not apply. It is imperative for small businesses and tax practitioners to be informed of these provisions.

The turnover tax regime largely adheres to the tax maxims developed by Smith (1776), namely: equity, certainty, convenience and efficiency. As it pertains to the principle of equity, the tax payable is determined on a progressive scale for both the turnover tax regime and the SBC regime, with the rate of tax increasing as the taxable turnover or taxable income increases. Consequently, the burden of taxation is borne by all in proportion to their means, a fundamental aspect of the equity principle. Nonetheless, some might still argue that the inability of ‘micro businesses’ to carry forward losses can be considered unfair. Additionally, the SBC regime offers accelerated capital allowances on qualifying assets, addressing the equity, convenience and efficiency. Both the turnover tax regime and the SBC regime are codified in the Income Tax Act. As a result, the tax which the small business owners are expected to pay is certain and not arbitrary, thereby satisfying the certainty principle. However, it remains evident that, although both regimes are codified, there persists ambiguity among small business owners regarding the application of SME tax preferences; hence, it is imperative for SARS to enhance its educational and awareness initiatives.

Tax policies are inherently dynamic, evolving in response to changing contexts. This study contributes to the existing body of knowledge by providing an updated assessment of SME tax preferences, which is important for SARS and the National Treasury to continually evaluate whether the SME tax preferences function as originally intended. A novel finding of this study is the identification of a gap in tax practitioners’ comprehensive understanding of the mechanics of the turnover tax regime. Furthermore, the present study provides a richer understanding of SME tax preferences, capturing nuances and subtleties that might otherwise be overlooked if one were to rely solely on numerical data.

The inherent limitation of this qualitative study is its incapacity to extrapolate the findings to the broader population of small business owners and tax practitioners, attributable to the limited sample size and lack of randomisation. Future studies may employ quantitative methodologies to confirm or refute findings of this study. In addition, the Davis Tax Committee (2014) noted that in its current form, the SBC tax regime is benefiting established, profitable, niche businesses, which were not the specific target of this incentive, further recommending that the regime be replaced with some form of a refundable tax compliance rebate, an incentive that subsidises tax compliance costs incurred by small businesses to remain tax compliant. Future studies may be undertaken to determine the potential configurations of the refundable tax compliance rebate.

Acknowledgements

The author would like to thank the tax practitioners and small business owners for their participation in this study.

The author reported receiving funding from the University of South Africa, which may be influenced by the research presented in the enclosed publication. The author has fully disclosed these interests and has implemented an approved plan to manage any potential conflicts arising from their involvement. The terms of these funding arrangements have been reviewed and approved by the affiliated university in accordance with its policy on objectivity in research.

M.O.N. is the sole author of this research article.

This research received funding from the University of South Africa.

The data that support the findings of this study are available on request from the corresponding author, M.O.N.

The views and opinions expressed in this article are those of the author and are the product of professional research. It does not necessarily reflect the official policy or position of any affiliated institution, funder, agency or the publisher. The author is responsible for this article’s results, findings and content.

References

Appendix 1