The South African Revenue Service is introducing a tax for small businesses to simplify the returns process. Simon Sweetman looks at the proposals and asks whether a similar system could work in the UK.

This question has been asked by some of those looking for tax simplification. Some (and up to now I have been one of them) thought this would be a simplification too far. However, we now have a real life example, as the South African Revenue Service (SARS) is introducing a tax for small business for 2009/10 (the South African tax year begins on 1 March).

Turnover tax is a simple tax that is being introduced for small businesses. The objective is to reduce the tax compliance and administrative burden by simplifying and reducing the number of returns that have to be filed. Joining the system is optional. A typical business may currently be liable for submitting the following to SARS:

• Value-added tax (VAT)
  
• Income tax
  
• Provisional tax
  
• Capital gains tax
  
• Secondary tax on companies (STC) - a tax chargeable on dividends

The simplified tax system will replace all these taxes with a simple turnover tax for small businesses (i.e. businesses with a turnover not exceeding R1 million per annum - approximately £80,000 at the current exchange rate - which in UK terms would include almost 90% of small businesses) and who meet all the criteria. These exclude professional service or personal service businesses, which may have very low levels of expenses, although limited companies can meet the criteria. It is also necessary to have an accounting date of 28 February to coincide with the tax year and companies have to deregister from VAT (the normal threshold is R300,000).

Some of the arguments for turnover tax are as follows:

• Record-keeping: If this is too much of a burden or too expensive, the turnover tax will be a better option.
  
• Meeting the requirements of the current tax system: If this is technically too difficult or too expensive to comply with, the turnover tax is a better option.
  
• Meeting the requirements of the current tax system by hiring a tax practitioner: If this is too costly then the turnover tax is a better option.

The third one here may not appeal to everyone(!), but one might add that it should all but eliminate the risk of the kinds of mistake which can land businesses with an enquiry.

Record keeping is of course much reduced, with no need to maintain lists of debtors and creditors, or even expenses. The only required records are:

• Records of all amounts received by the business for each year of assessment.
  
• All dividends declared for the year of assessment (obviously, only for companies).
  
• Records of all assets with a cost price of more than R10,000 each.
  
• Records of all liabilities that exceed R10,000 each.

Businesses will still have to operate PAYE (though of course many of them will not have employees).

The rates start at 0% for the first R100,000 and the effective maximum is 3.8% on R1million. Income tax rates in South Africa run up to 40%.

The response in South Africa appears to be highly enthusiastic, with the South African Institute of Chartered Accountants welcoming the measure (though pointing out that businesses making losses should not apply).

Could it happen here? What it really turns on is just how much of a burden keeping even simple records is for micro businesses (and some recent conversations with accountants do suggest it remains a widespread problem).