What the VAT increase means for small business owners


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.”


He adds that while cash flow is an essential part of successful business management – in an increasingly strained environment, this is as important as ever. “Taking into account the VAT increase’s effect on consumers and their ability to purchase goods and services from a small business is one thing. But it’s vital to consider its effect on a business’ ability to pay its own debts as well as pay for essential products and services, which will also incur price increases.”


Engelbrecht explains that with a business having to adjust its budgets to allow for price increases in operational expenditure (including fuel levies which are also set to increase this year), and also considering the possible decrease in spend by its customers – it is going to be crucial for entrepreneurs to pay even closer attention to their monthly cash flow statements in order to remain on top of their finances.


Engelbrecht adds that there are a few steps entrepreneurs can take to counter the negative impact of the VAT increase. These include offering early account settlement discounts to debtors; remaining vigilant about regularly reviewing cash flow statements; keep cash flow statements as realistic as possible and make adjustments for periods of downturns as a result of a strained economy.


He concludes that while this increased VAT rate is not going to aid the small business sector, given that consumers are already feeling the pressure of a tight economy, it was necessary. “The main aim of this budget was to decrease the country’s budget deficit without negatively impacting business and consumer confidence. Increasing the VAT rate – while likely to be unpleasant over the short term – is ultimately what the country needs to hold off another credit ratings downgrade and create a stable environment for long-term growth.”