The Government announced in its 1995 Budget that it agreed with the Katz Commission that there is a need to reduce the "compliance burden and cash-flow constraint of small enterprises".
It was said that one of the ways to do this would be to allow small businesses to be taxed on a cash-flow basis.
What this would have meant to you, if your Closed Corporation or company is a small enterprise, was that your working capital requirements would have been eased because the business would have been taxed on income only when it received the cash and would deduct expenses only when it had paid them.
From a cash flow, and survival point of view, the benefits of this are obvious.
It would also have meant that, for tax purposes, you wouldn't have to account for income and expenditure on the accrual basis.
Although the 1995 budget review book said that further research would need to be done to define a small enterprise, it also said that amendments to the Income Tax Act would be made to provide for relief in that year.
The recommendations seemed to be sound, and under VAT legislation businesses with taxable supplies for a year of less than R2,5 million could already pay VAT output tax and claim VAT input taxes on a cash basis (or "payments basis" as it is called in the Act).
It seemed therefore that it should be fairly simple to put the legislation together surely businesses paying VAT on the basis of cash received, and claiming VAT on the basis of VAT paid to suppliers, would be the logical choice for the cash basis for income tax.
This system would also make it easy for the Revenue authorities to reconcile turnover and expenses for income tax purposes with turnover and VAT input taxes for expenses reflected on VAT returns.
So we all waited, with bated breath, to see the legislation come out, and for small enterprises to experience the promised relief. But legislation passed in 1995 did not contain anything relating to the cash basis. Nor did legislation passed in 1996 and 1997.
This year the budget proposals include a recommendation that relates to the cash basis, but contrary to the 1995 proposals, the recommendation is that the availability of the VAT payments basis be restricted to natural persons, bodies comprising solely natural persons and local authorities.
This means that this year we move further away from the cash basis.
So if your company or CC currently pays VAT on the payments basis, when the change is legislated, you will have to do the following:
* Determine the total amount of outstanding debts which relate to invoices on which VAT is reflected, and pay over the VAT relating to those debts;
* Determine the total amount you owe creditors who have charged VAT, but whom you have not yet paid, and claim the input tax.
Far from reducing the administrative and working capital burden of small enterprises, this will clearly increase it.
If this change will affect you, in order to make the changeover easier, I suggest you start looking now at your accounting system to make sure it can account for the VAT on an invoice basis, and also that on the changeover date, you will be able to obtain the right information to pay and claim the correct VAT.