South Africa’s tax and labour laws are preventing the country from fostering entrepreneurial talent, with the result that opportunities to create new jobs are being significantly limited.
This is according to Andrew Brown, Director at The Daily Buzz, the corporate coffee bar operator, who says that while South Africans have a natural tendency towards running their own businesses, the government needs to do far more to help nurture SMEs.
“There are too many rules and regulations currently restricting the growth of new businesses, which either makes it more difficult to start a business or constrains entrepreneurs who have managed to do so.
According to the Doing Business 2014 Report, it takes 19 days on average to register a new firm in South Africa. This is roughly a week longer than it takes in OECD high-income countries.”
Brown says South African labour laws are far too rigid.
“The labour laws do not favour a meritocracy, where those who add more value are recognised. Instead, the laws have created an administratively intensive process, which costs time and money when dealing with problem employees. As a result, the law tends to entrench those who are employed and does not favour the creation of new jobs.”
“For a services-based business in particular, such as a retailer or food operator, where staffing costs result in high initial overheads, it is important to provide appropriate incentives, as these businesses have the potential to add real value to the local economy through the creation of new jobs.”
Brown notes that the skills levy that is paid also often returns little value.
“It would be preferable to scrap the Services Education Training Authorities (SETAs) and instead institute some form of training tax rebates back to those SMEs that actually demonstrate a financial commitment towards training their employees.”
He adds that the current tax system also creates an unnecessary burden for small businesses.
“Entrepreneurs have to deal with multiple tax structures including VAT, PAYE, SDL, UIF, income tax and workmen’s compensation. These are all important but it can be hugely cumbersome and complex for a new business. A simplified tax regime for SMEs or for start-ups would help to nurture a business in the first few years of its existence.”
He says a further constraint for entrepreneurs is limited access to finance. “Banks should be encouraged to lend and provide support to SMEs at acceptable rates of interest, through some form of guarantee system. Many banks simply do not have the risk appetite to finance early stage SMEs; their credit models are also often restrictive and interest rates are too high.”
Brown also notes that while BB-BEE is well intentioned, there should be a reduced burden on smaller businesses.
“Compliance with BB-BEE can prove a major distraction to a small business that should be purely focused on growth. If SMEs up to a certain turnover, say R100-million, were exempt from these requirements it would help them to focus on managing the actual business.
“There is also the additional cost of BB-BEE accreditation, in addition to procurement stipulations on what to spend and who to spend with, all of which takes time and effort to comply. This time would be better spent on growing the business, increasing turnover and thereby creating more economic value and jobs,” says Brown.
He says that even with instituting changes to tax structures, labour law and access to finance, many South Africans are fearful of starting a business, as failure is severely punished. “The penalties for failure, such as bankruptcy laws, are too penile. A sequestrated person,failed business owner, needs to first rehabilitate themselves before they are able to begin a new business, which does not encourage risk taking.”
Summarising his tips for the government regarding South African entrepreneurs, Brown offers the following:
– Ensure that labour laws help to focus more on rewarding merit and less on administration-intensive processes.
– Institute a simplified tax regime for SMEs or for start-ups in the first few years of their existence.
– Encourage banks to lend money to SMEs at acceptable rates of interest and offer their support through some form of government backed guarantee system.
– Provide appropriate incentives for services-based businesses that have high staffing costs, but great potential to create new jobs.
– Institute some form of training tax rebates back to those SMEs that demonstrate a financial commitment towards training their employees.
– Reduce the BB-BEE requirements on smaller businesses by exempting smaller SMEs with a lower turnover from the standard requirements and giving them high procurement spend recognition, to allow them to focus on managing and growing their actual business.
“SMEs can have a hugely positive impact on the local economy but this sector of the market needs to be prioritised by the government through the creation of policies aimed at assisting small businesses and the removal of obstacles to help with these issues,” concludes Brown.