Covid 19: Unpacking the Tax Relief for Small Businesses




The national lockdown due to the Covid-19 virus is undoubtedly wreaking havoc on the economy.  Small businesses have been hard hit – many not knowing if they will have sufficient cash flow to resume operations when things eventually return to normal. Or at least a ‘new normal’.  And who knows when that will be?

Government has recently announced certain special tax measures to assist small business owners who are battling financially due to the effects of this global pandemic.  It is important to emphasize that these tax relief measures are only available from 1 April 2020 to small and medium companies (sales less than R100m per year) that are 100% tax compliant. This means that if you are not up to date with your business’s returns or have any outstanding tax debt, you will not be eligible to receive these benefits. Note, these measures originally applied to small businesses with turnover of less than R50m per year, but this was updated on 21 April 2020 to  include businesses with turnover up to R100m per year).

SDL (Skills Development Levy) holiday
(update 21 April 2020) 

There will be a 4 month SDL holiday for small businesses from 1 May 2020 to 31 August 2020.
This means that there will be NO SDL payable for May, June, July and August. Since SDL is calculated on 1% of salaries, this should provide some temporary cashflow relief for small businesses.


PAYE: deferral of 35% of monthly payment
(21 April 2020: tax deferral increased from 20% to 35%)
(27 August 2020: tax deferral extended to include August; payment back to start 7 Oct)

From April 2020 to July 2020, small businesses may opt to pay only 65% of their PAYE liability to SARS without incurring any penalties or interest. The remaining 35% PAYE liability must be paid over in 6 equal instalments starting in August’s EMP201 declaration (due 7 September). This amendment will apply to April, May, June and July’s PAYE declaration (EMP201).

Let’s explain this by way of an example.

Company A has the following PAYE liabilities due:

*March 2020:    R100 000 

April    2020:     R100 000

May     2020:     R85 000

June    2020:     R105 000

July     2020:     R105 000

*March 2020 does not qualify for relief and must be paid in full.

Company A is tax compliant and wants to take advantage of the relief offered. It pays 65% of its PAYE to SARS for the following months:

April   2020:   EMP201 (due 7 May) R65 000 (65% x R100 000) 

May    2020:   EMP201  (due 7 June) R55 250 (65% x R85 000)

June    2020:  EMP201 (due 7 July) R68 250 (65% x R105 000)   

July    2020:   EMP201   (due 7 Aug) R68 250 (65% x R105 000)

At 31 July, Company A owes SARS the remaining 35%:

April 2020:     R35 000 (R100 000 – R65 000)

May 2020:      R29 750 (R85 000 – R55 250)

June 2020:     R36 750 (R105 000 – R68 250)

July 2020:      R36 750 (R105 000 – R68 250)

Total:             R138 250

Company A must pay R138 250 back to SARS in 6 equal monthly instalments with the first instalment of R23 041 (R138 250/6) due by 7 September 2020.

The details of how to capture this arrangement in the monthly EMP201 have not yet been communicated. We would expect to receive a further update before the April EMP201 submission is due (7 May).

Provisional tax: deferral of a portion of the 1st and 2nd payment

Before getting into the nitty-gritty of this relief measure, let’s do a quick recap of provisional tax payments for businesses.

Companies are required to make their first provisional tax payment (50% of their estimated tax liability) within 6 months of their financial year and their second payment (estimate of total tax liability reduced by their 1st provisional payment) by the end of their financial year.  Sometimes there is a small amount still due and this can be made by way of an optional ‘top-up’ third payment which will be due six months after the companies year end (unless it’s a February year end in which case, the payment is due at the end of September). The timing of these payments will differ from company to company depending on the company’s year-end.

The Covid-19 tax relief measure allows the following:

  • First provisional payment based on 15% of the total estimated tax liability
  • Second provisional payment based on 65% of total estimated liability
  • Third provisional payment for remaining 35% (100% - 65%)

This special concession is for companies, which make provisional payments from 1 April 2020 to 31 March 2021.

Let’s look at an example:

Company B is tax compliant, with a financial year-end of 30 June 2020.  It would already have paid its first provisional tax payment of approximately 50% of its tax liability by 31 December 2019. Its second provisional payment will be due by 30 June 2020.  Based on the temporary tax relief measures, it needs to pay only up to 65% of its estimated tax liability.

The total estimated tax liability for the year ending 30 June 2020 is R850 000.

1st provisional paid at 31 December 2019: R425 000 (50% x R850 000)

2nd provisional due 30 June 2020: R127 500 [(65% x R850 000) – R425 000]

Total provisional payments for 2020: R552 500 (R425 000 + R127 500 = 65% x R850 000)

Cash flow available at 30 June 2020 due to special tax relief:

R297 500 (R425 000 – R127 500)

3rd top-up payment due by 31 December 2020: R297 500 (R850 000-R552 500 

Company B will have some temporary cash flow relief (R297 500) however it will have to pay this to SARS by 31 December 2020 in order to avoid penalties and interest.

This amendment will be effective from 1 April 2020 and will apply to first provisional tax periods ending on or after 1 April 2020 but before 1 October 2020 and to second provisional tax periods ending on or after 1 April 2020 but before 1 April 2021.

There is no guidance out yet for sole props (i.e. non-registered businesses) and their provisional payments, however hopefully there will be some temporary relief offered here too. We will keep you updated.

Employment Tax Incentive (ETI): changes to the programme
(21 April 2020: tax relief increased from R500 to R750)

What is the ETI in a nutshell?

It is a programme, which was introduced in 2014 to promote employment of young workers (age 18 years to 29 years). The government allows employers who hire employees who fall into this age bracket and earn below R6 500 per month to claim a tax incentive for the first two years of their employment. The tax relief is equal to R1 000 per month per employee for the first year and R500 per month per employee for the second year. The benefit effectively reduces the employer’s monthly PAYE liability.

If the ETI is more than the PAYE liability, then the PAYE due is reduced to nil with the remaining ETI being carried forward to be utilised in the following month. A reconciliation is done twice a year and any excess ETI (meaning ETI which has been carried forward because it exceeds the PAYE) will be refunded by SARS to employers - only tax compliant ones of course!

In an effort to minimise job loss due to this devastating pandemic, the government has proposed a plan to expand the relief and relax the rules for four months from 1 April 2020 to 31 July 2020 

These are the proposed changes:

  • Increase the amount claimable from R1 000 to R1 750 per month per employee in the first year
  • Increase the amount claimable from R500 to R1 250 per month per employee in the second year
  • Allow a monthly claim of R750 per month for employees (age 18 – 29 years) who are no longer eligible as the employer has already claimed the benefit for 24 months
  • Allow employers to claim R750 per month for employees from age 30 to 60 years who would ordinarily not qualify for the benefit due to their age
  • Paying out ETI reimbursements every month (instead of twice a year)

This expanded relief only applies to businesses, which were already registered as employers at 1 March 2020.

Let’s look at an example to see the effect of these changes.

Employer C has 4 employees who each earn R5 000 per month: 

Michael, 27 years, worked for Employer C for 3 years.

Simon, 35 years, worked for Employer C for 2 years.

Refilwe, 22 years, recently joined Employer C.

Janet, 25 years, worked for Employer C for 13 months.

                                              ETI                ETI Expanded             Total             

Michael                                     0                        R750                      R750

Simon                                       0                       R750                      R750

Refilwe                                   R1000                  R1750                     R1750

Janet                                      R500                   R1250                    R1250

Total                                     R1500                                              R4500 

Under the new rules, Employer C will be reimbursed an additional R3 000 for the month (R4 500 -R1 500).

There has been concern raised about how the monthly administration and reimbursement under this scheme will work in practise. It will be interesting to see how this pans out.

Donations to Solidarity Fund
(new relief announced 21 April 2020)

Donations to registered Public Benefit Organisation are ordinarily deductible up to 10% of the taxpayer's taxable income. However, the president recently announced that the limit has been increased by an additional 10% to 20% of taxable income.

For example, if a taxpayer earned R800 000 per year, before this new relief measure, they could donate up to R80 000 (10% of R800 000) to the Solidarity Fund and claim a tax deduction. If they donated more than R80 000 however, they would not earn any further tax relief.  This increased limit means that the taxpayer can now donate up to R160 000 (20% of R800 000) and claim this full amount as a deduction for tax purposes.

 

If you have any questions about the Covid-19 tax relief measures, please contact our Helpdesk who are on standby to assist you.

Image by Steve Buissinne from Pixabay

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