The landscape of incorporated South Africa in the financial and business services sector has changed dramatically: in 2007 a total of 222 532 companies in this sector submitted tax returns, but SARS Company Income Tax (CIT) data show by 2016 this figure had shrunk to 139 664: a 37% decline.
The CIT data base records a decline by almost 83 000 incorporated firms. What happened?
This sector includes banks, money lenders, short term insurance firms and independent brokers, investment advisors, business consulting firms as well as real estate services. Figure 1 shows how the number of firms were relatively stable from 2007 to 2010 before a rapid decline before stabilising again from 2014 onwards.
Financial crisis and a business unfriendly environment
A multitude of factors drove this sectoral decline, but the most important were:
- The financial crisis of 2007 and 2008: It dramatically reduced turnover and profits with a 79.6% decrease in the taxable turnover from 2008 to 2010. Low profitability, depleted cash reserves and a struggle to procure loans triggered both the collapse of firms, as well as substantial consolidation.
- A dramatic increase in the administrative and regulatory burdens: Compliance for small firms constitutes time and cost burdens, undermining their sustainability. Top fund managers often complain about the 16-hour training that they should attend, but the remaining team members can continue to handle queries of investors and react to sudden market movements. The owner-manager of a small advisory firm simply loses in similar circumstances two productive days, having no access to high level support personnel. In the investment advisory services subsector there was substantial consolidation with independent smaller firms closing or being swallowed by larger ones. The extent to which PSG Konsult has expanded since inception, is a case in point.
- Stalling property prices and the absence of long term confidence: The real estate segment of this sector also experienced the demise of numerous of the smaller real estate firms. Simultaneously the period saw the expansion of the likes of Pam Golding, Sotheby and Seeff to smaller towns.
- The high cost of crime for businesses in SA: South African businesses struggle with the fifth highest cost of crime in the world, according to the World Economic Forum.
- A future of prosperity and security outside South Africa: Not only has more than 400 000 high income professionals emigrated since 1994, but millions of remaining individuals utilise the easing of forex controls to let their money emigrate. The 400 000 (and the locals whose investments have emigrated) now use advisors in Singapore, London, Frankfurt or New York, resulting in a lower demand for similar services within South Africa.
Long term insurers contracted by 78%
SARS records long term insurance companies as a separate sector. The number of companies reporting in this sector declined by 78% from 312 in 2007 to 69 in 2016. Where the 312 had taxable income of R19.9 billion in 2007, the 69 in 2016 jointly registered losses of R6.6 billion. The fact that CIT from this sector nevertheless amounted to R12 billion is indicative of some large companies that record substantial profit.
SMEs under particular stress
A poor economic climate coupled with high regulatory requirements and the outflow of high level high remunerated skilled professionals because of political and security reasons, had knocked SMEs in the financial and business services sector. The change in average taxable income over the ten years reflect the higher survival rate of the larger companies.
CIT data indicate that the SME component of the business world is particularly under stress. Contrary to popular belief, however, SMEs are not better creators of sustainable jobs than large companies. Nevertheless, the demise of many smaller firms is not a good outcome, since it contributes to concentration.
Other sectors that registered substantial declines in the number of companies registered for CIT, were:
- Retail with 44 972 companies that deregistered (a 57% decline);
- Agencies with 11 799 (20% decline);
- Wholesale trade losing 6 310 firms (28%)
- Transport & storage losing 3378 companies (15%).
Sectors that have experienced growth in the number of taxpayers, include:
- Construction with 15 881 more firms in 2016 than in 2007;
- Social and community services: 4 991 extra firms, an increase of 33%;
- Personal & household services: 3448 extra firms and growth of 50%;
- Catering & hospitality: 3 239 more firms (17% more), and
- The non-descript “Other” with 225 642 more firms.
No-one should seek any solace in the latter: despite the massive growth in numbers, joint tax returns show a loss of R12.5 billion and a mere R36 million was collected through CIT.
The South African world of enterprise is, apart from a number of large firms, indeed in a rather precarious position. There is little if any understanding of that in governing circles and in policy.
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