Much have been said about the Approved Small Business (ASB) regime featured in the Small Business Development Act, particularly since this status is required for a company to pay the rate of 5.5% on its taxable income.
Considering this, the Small Business Association of Barbados focused its October webinar on sensitising members and partners alike, on the definition of an Approved Small Business and, the benefits and conditionalities surrounding this regime. Whereas less than 150 firms were currently ASB, out of a market of over 9000 formal enterprises, there is significant interest in the sector for this framework and this warrants continuous sensitisation and education about the process.
A recent exploratory survey conducted by the SBA revealed that though 11% of members were ASB, some 80% were desirous of becoming an Approved Business, thus benefiting from the regime. It was therefore no surprise that over 200 business owners participated in robust discussions during the October webinar on the merits and demits of the administration.
ASB status is obtained under the Small Business Act (Cap. 318C) granted by the Minister of business development. The architects of this regime intended that the status would help small businesses “enhance their operations and increase their competitiveness”.
Eligibility is determined by two factors:
- Meeting the definition of an Approved Business
- Providing significant or substantial economic benefit to Barbados.
Section 3 of the Act[1] provides that a small business is an enterprise that:
- Is incorporated under the Companies Act Cap 308
- Has satisfied any 2 of the following criteria:
- The small business has not more than $1,000,000 as stated or paid up capital;
- The small business has not more than $2,000,000 in annual sales;
- The small business has not more than 25 employees.
- Subject to subsection (2), is not more than 25 per cent owned or controlled by a company whose share capital and annual sales exceed the share capital and annual sales mentioned in paragraph (b) or by a subsidiary of that company or by a subsidiary of a larger group of companies;
- Is not controlled by a company whose share capital and annual sales exceed the share capital and annual sales mentioned in paragraph (b) respectively;
- Has no agreement for the payment of fees on a continuing basis for managerial or other services that do not form part of the normal business operations of the enterprise.
Appreciably, participants were concerned that the requirement for incorporation would be quite difficult for small business owners as this process required an attorney-at-law, which is often synonymous with huge costs. It was therefore a relief to note this condition was no more, incorporation no longer needed an attorney.
The next step of determining eligibility is the socio-economic benefit[2]. This benefit has three different criteria to meet.
- Generation of new investment or the development of products or processes
- An improvement in employment, production capacity through market research, technical invention or innovation
- The enhancement of export potential, foreign exchange earnings or savings or the general welfare of persons in Barbados
Once these criteria have been met the small business can proceed to the application process.
Application can either be fulfilled by completing Form 1 which is for businesses in operation for more than one year or Form 1A for businesses that have been operational for less than one year.
Section 4(2) of the Act dictates the relevant accompanying documents with either Form. These include:
- Certificate of incorporation
- Certificate of Clearance (National Insurance Service & Barbados Revenue Authority)
- Audited Financial Statements/ Financial Reviews
- Financial Projections for 3 years
- Company profile[3]
- Share Certificate copies
- Articles of incorporation
The benefits to be accrued to the business must outweigh the cost of the process. This has been the repeated refrain of business owners in the past, thus the low uptick in applications to the scheme.
The incentives pursuant to section 7 of the Act include:
- Preferential corporation tax rate of 5.5%
- Exemptions from import duty on raw materials, plant and equipment
- Exemptions from withholding tax on dividends
- Exemptions from payment of stamp duty
- A deduction of corporation tax of the actual expenditure incurred in respect of the use of technology, market research and any other activity that is, in the opinion of the Commissioner of Inland Revenue, directly related to the development of the business.
At the time of introducing the legislation in 1999, the focus was more geared towards incentivising manufacturing businesses. The demographics in the sector have changed significantly today, where over 80% of firms are service oriented. The question of the attractiveness of the aforementioned benefits is one that cannot be easily ignored.
Notwithstanding the information provided and the level of engagement by small businesses, there was still some skepticism expressed to the extent that some participants indicated their intention to pay the 9% on taxable income than undergo the process to become an ASB. As they say, “the proof of the pudding is in the eating”, it will therefore be instructive to return to this issue in six – nine months to see what the uptick of applications for ASB is. If the results suggest marginal growth, then Government will have to conduct an overall assessment of the regime to make it more fit for purpose.
[1] Small Business Act Cap 318C
[2] See n (1)
[3] Small Business Act Cap 318 C s 4(3)
