Following President Cyril Ramaphosa’s announcement of fiscal relief for certain taxpayers, in light of other measures imposed to combat the COVID-19 crisis, National Treasury published explanatory notes on 29 March 2020, which outline exactly how the tax system will be used to ease financial distress during these times.
The general intent with these measures, which will take effect on 1 April 2020, is to alleviate cash flow constraints and to prevent wide-scale shedding of jobs. The question is, are these measures well considered, or will they simply postpone the inevitable?
The fiscal proposals can be summarised as follows:
Expansion of Employment Tax Incentive (“ETI”)
- The expansion will apply for four months from 1 April to 31 July 2020.
- The maximum amount claimable will be increased from R1,000 to R1,500 if the employee is still in their first 12 months of employment and from R500 to R1,000 if in the second 12 months of employment.
- Allowing a monthly ETI claim of R500 for employees who are –
- 18 – 29 years of age who are no longer eligible as their employer has already claimed ETI for 24 months for that employee; and
- 30 – 65 years of age who would otherwise not have qualified due to their age.
- Accelerated payments from twice a year to monthly.
Deferral of PAYE
- It is proposed that the payment of 20% of PAYE liability be deferred for a period of 4 months without SARS imposing administrative penalties or interest. This only applies to businesses with an annual turnover of less than R50m.
- Practically, the deferred PAYE liability must be paid to SARS in equal instalments over a six-month period, which commences on 1 August, meaning the first payment must be made on 7 September 2020.
- The relief is not available to employers with outstanding returns or with an outstanding tax debt, unless very specific circumstances apply.
Deferral of provisional corporate income tax (“CIT”)
- Deferral of a portion of the payment of the first and second provisional tax liability to SARS, without imposition of penalties and interest.
- The first provisional tax payment due from 1 April 2020 to 30 September 2020 will be based on 15% of the estimated total tax liability, whereas the second provisional tax payment from 1 April 2020 to 31 March 2021 will be based on 65% of the estimated total tax liability.
- The deferred payments (the balance of 35%) must be paid when making the third provisional tax payment.
- The same qualifying criteria that apply to PAYE find application here.
Will good intentions translate to good results?
One may ask if it would be wise for an employer to create a future PAYE obligation in respect of an employee who may no longer be employed when the payment is due. Downscaling in these times is unavoidable for many employers and their tribulations may compound if they have to start making payment of deferred PAYE in September if a segment of their staff contingent is no longer with the company.
Moreover, when September comes along their PAYE liability will now be even higher than it was before the measures were put in place. For some businesses, 4 months may be sufficient to recover from the crisis, but for many the effects will prevail for much longer. The additional PAYE liability from September onwards may just be the straw that breaks the business.
In terms of provisional CIT payments, the fiscal relief extends over a longer period, but again in the bigger scheme, the deadline for final provisional tax payments may nonetheless come too soon to truly see certain businesses through. It is also important to note that provisional tax payments are based on estimates of taxable income.
Patently, with the anticipated slow-down and the concomitant reduction in revenue, estimated taxable income in the short term will be reduced considerably, which may yield marginal results from a relief perspective.
Perhaps, government should have taken a leaf from the tax measures imposed by the UK, where the VAT system was brought into the equation. Many small business owners will attest to the fact that their companies went under because of the way our VAT system operates. In most cases, VAT vendors have to account for supplies upon issuance of an invoice, as opposed to the date of receipt of payment.
This simply means they have to keep paying VAT over to SARS, even if their invoices have not been paid. The suffocating effect of this phenomenon will be more acute in the coming months and a less distortive intervention would perhaps be to allow small business owners to operate on payment basis until we see things change.
A further measure that could be implemented is to permit deductions in respect of contributions made to the Solidarity Fund, which was established specifically to help combat the virus and the effects thereof. Such an initiative would benefit the taxpayer and the country as a whole.
Given the short amount of time government has to implement fiscal relief and with prevailing budget constraints, this must have been a very difficult task. But it is short sighted to think that small businesses simply need 4 months of relief to ride out the storm. The current fiscal proposals may be sufficient for some businesses, but it may simply delay the inevitable for many others.