A Start-up Guide To Being Tax Compliant
Nkechi is the co-founder of a blooming start-up. She’s a model business owner as she does everything according to the books and ensures that all that she and her team does always follow due process. At a networking event for start-up founders, she met Jide who also was running a brilliant and dynamic start-up. As they shared thoughts amidst ‘chops and drinks’ Jide asked Nkechi a question that startled her a bit. He said, “how are you coping with taxes?” Taxes? was her response. Jide smiled, pulled her a chair and started to explain things to her.
We’ll share the details of that conversation with you so you might need to grab a seat too and ‘jot things down’
Let’s start from the basics.
What is Tax?
Tax is a compulsory contribution levied by the government. Taxation is important in any economy and its effects remain significant because it helps greatly in the redistribution of income and gives the government funds that it can use to finance public services such as the provision of adequate national security, public infrastructure, power, good road network and a host of other social amenities. So it’s important for you to pay your taxes.
Whilst there are different types of taxes, we will focus on those you should know and pay as a small business.
Companies Income Tax: Companies Income Tax (CIT) is a tax on the profits of a company. All registered companies in Nigeria are required to pay CIT. Resident companies are liable to pay CIT on their worldwide income, while non-resident companies are subject to CIT on their Nigerian-sourced income. The CIT rate is 30% and is assessed on a preceding year basis (i.e. tax is assessed on profits for the accounting year prior to the year of assessment). For companies into manufacturing or agricultural production, mining of solid minerals, and wholly export-based businesses with a turnover of not more than N1 million, the CIT rate is reduced to 20% in the first five years of operation. Businesses engaged in upstream petroleum operations are not required by law to pay CIT as they are covered by the Petroleum Profit Tax Act (PPTA).
Personal Income Tax: Personal income tax is a tax imposed on the income of individual adults, communities, families, executors and trustees from all sources. Personal income tax is calculated after some reliefs have been deducted and/or certain expenses exempted according to the Personal Income Tax Act. Individuals who are employees of an organisation pay their personal income tax through a method called Pay As You Earn (PAYE) i.e. their income is deducted by their employers before they are paid their salaries. The employer is the one responsible for deduction of the personal income tax and subsequent remittance to the tax authorities. Individuals who are self-employed are to pay their taxes under the direct and self-assessment method.
Value Added Tax: It is a consumption tax that is levied on a product or services whenever value is added at each stage in the chain of production to the point of sale. It can also be said to be an indirect tax placed on the domestic consumption of goods and services, except for those that are zero-rated (not liable to tax), such as food and essential drugs, or goods or services generally exempted by law. This means that any person or individual, corporate sole, organizations that consumes or buys any taxable product or service will have to pay VAT. In Nigeria, the average VAT rate charged on the purchase price of certain goods and services is 5%. As soon as you register your business, whether as a company or a business name in Nigeria, you are expected to start filing VAT returns. VAT is paid by your customers on whatever money they pay you for your goods or services. Where a business does not earn revenue in a month, or hasn’t started operations, the business is expected to file a NIL return, i.e. you go to the FIRS office nearest to you and fill a VAT returns stating that you made no earnings that month.
Stamp Duties: Under the Stamp Duty Act, stamp duty is payable on any agreement executed in Nigeria which includes those relating to any property situated in Nigeria. It is chargeable either at fixed rates or in proportion to the value of a transaction or a property, depending on the class of instrument. Where you prepare documents bordering on deed of assignment of a property, memorandum and articles of association of a company, and legal mortgage, ensure that you have them stamped. It is important to do so because it ensures that these documents are admissible when they are tendered before any law court in Nigeria.
At this point, Nkechi let out a sigh. Jide smiled, refilled her cup of juice and went on to finish his “TEDx talk“. He told her that there are agencies in the 3 tiers of government who collect and enforce taxes. At the Federal level, there is the Federal Inland Revenue Service (FIRS), while the State Governments level, there are the respective State Boards of Internal Revenue (SBIRs) of the thirty- six states of the Federation, one of which is the Lagos Inland Revenue Service (LIRS). Local Governments also administer rates and levies collectible by them through their various councils.
He rounded of by advising her to seek proper counsel from a learned professional in tax related matters who can guide her through the processes involved.
We advise you do the same too.