Accounting and Taxation Basics for Small and Medium Enterprises (SMEs)
August 26, 2019
Question: Do you want your business to grow into a bigger business which is viable for investors to fund?
Yes, indeed! Then you have to be accountable.
Question: Do you want your business to leave its footprints in the sands of time?
If yes, then set your priorities right from the inception!
Question: Is it difficult to manage your accounting and tax records because you run a small business?
Absolutely NOT! You need to start doing the right things.
It is quite easy to say that with the advent of a number of initiatives to make funds available for small businesses and encourage SMEs to grow, there have been series of programs launched to make this impact measurable to small businesses, including; the Youth Empowerment Scheme of the Bank of Industry, Tony Elumelu Entrepreneurship Program, GroFin Fund, Lagos State Entrepreneurs Trust Fund for startups, Small and Medium scale Enterprises (SMEs) etc. So far, they have all been great initiatives, and their number is increasing by the day. The contribution of these initiatives to the growth of SME business activities and development of the Nigerian economy cannot be over emphasized.
The long-run goals of businesses are profitability and sustainability. Many at times people start up businesses having a deep foresight and understanding of the goals they intend to achieve which is quite paramount in determining the success or otherwise of the business. Once business development goals are set beforehand, actions necessary to actualize them should be mapped out and acted upon.
There is a need for SMEs to have basic knowledge of the fundamentals of accounting and tax related issues, as this will go a long way in shaping the business and ensuring it achieves its founding goals while growing without falling victim of paying huge fines and penalties for not doing things right by complying with the provisions of the regulatory laws and reporting standards.
What books of accounts do SMEs need to keep?
Keeping the right books of account and records from the onset is very essential to the success and expansion of every business aspiring to grow and outlive its owners. The following are key;
• Open a separate bank account for your business that is different from your personal bank account. This would help account for your actual turnover and avoid personal funds from being recognized and taxed as business income by the relevant tax authorities.
• Track your expenses effectively. Make sure you get invoices and receipts for every purchase; this will help to prove claims of allowable deductions on taxable income.
• Maintain proper bookkeeping. This is the process of recording, categorizing transactions and reconciling bank statements which can be done using an accounting software like QuickBooks or manually with Excel spreadsheets. Major books of accounts to be kept are cashbook, sales day book and purchases day book.
• Keep an effective payroll system which should preclude the business owners from dipping their hands into the business account at intervals for personal use. Regardless of how few the number of your staff is, get it right from the beginning because this will save you from the hassle of having to reconcile records when they get muddled up.
Registration with tax authorities
• Income tax registration: Within six months of registration with the Corporate Affairs Commission or commencement of business, every business including an SME is expected to register with the Federal Inland Revenue Service (FIRS) if it is a Limited Liability Company (LTD), or with the respective State Internal Revenue Service (SIRS) of the state where the company intends to operate if it is a Business Name, for income tax purposes.
• VAT registration: All businesses should be registered with the FIRS for VAT purposes irrespective of its company type.
• Tax Identification Number (TIN): A TIN which is a unique number for a taxpayer’s identity will be given after registration. This number will be used for opening a business bank account and doing other business transactions. The employees are also expected to have their unique Taxpayer ID/TIN depending on the state in which the employees reside as this is necessary for staff tax clearance certificates processing.
• Pay As You Earn (PAYE) registration: If you are not running a one-man business, you need to register your staff with the SIRS for PAYE purposes.
All these registrations are simply done by visiting a tax office close to where your business is domicile, filling the necessary forms provided and attaching all necessary documents required.
• Value Added Tax (VAT) returns: Every business once registered is expected to start filing VAT returns on or before the 21st day of the month for the VATable transactions of the previous month. The FIRS VAT Form 002 should be filled correctly and the e-ticket evidencing payment of the VAT payable attached. A NIL VAT returns is filed when, but not only if, no sales was recorded in the previous month and a bank statement should be attached to prove that.
• Annual PAYE returns: This returns is expected to be filed on or before the 31st of January of every year in respect of the PAYE tax deducted and remitted in the previous financial year. The returns include the employer’s declaration of the gross income of employees and PAYE taxes paid for the immediate preceding year on a schedule referred to as Form H1 including the receipts for the PAYE remittances and a projected payroll of the current year but in some states apart from Lagos there has to be attached another schedule showing the income, deductions and tax paid relevant for the three preceding years referred to as form H2.
• Company Income Tax (CIT) returns: Limited liability Companies have a duty to file CIT returns on or before six months after the company’s accounting year end on an annual basis with the current year being referred to as the Year of Assessment in which the returns are due for submission and taxes are due for payment.
• Withholding Tax (WHT): This returns should be filed on or before the 21st day of the month following the month in which the deductions were made or when the transactions occurred depending on the nature of transaction and the provisions of the law as regards such.
Taxes to be paid
• Personal Income Tax (PIT)/Company Income Tax (CIT): Companies are to pay 30% of their chargeable income to the FIRS while enterprises/business names are to pay PIT using the tax graduation table.
• Value Added Tax (VAT): VAT is a consumption tax levied at every level of production and ultimately borne by the final consumer. Businesses add VAT at the rate of 5% to the sales price of the goods or services they offer in Nigeria. They also pay VAT, just like consumers, on goods and services that they consume.
• Pay as You Earn (PAYE): Businesses are expected to deduct PAYE tax correctly from the salaries paid to their employees/staff. They are to remit same to the relevant SIRS on or before the 10th day of the month following the month of deduction.
• Withholding Tax (WHT): This is an advance payment of income tax. Every business is required to make deductions from every taxable person with whom the company has business dealings (Vendors/suppliers, Investors) etc. using the rates as listed in provisions of the tax laws and remit same to the relevant tax authority when payments are being made or when it becomes due depending on the provisions of the law as regards such. e.g. WHT on Rent, Dividend and Interest are paid when it becomes due but WHT on Contract/supply is due when payments are being made in line with the provisions of the law.
Conclusively, we understand that in the pursuit for companies to survive and seal business deals, there may be no adequate time to coordinate the accounting and tax related issues so, engaging the services of a tax and accounting expert will save you the stress and time of having to manage all your tax matters while allowing you to focus on your core business activities avoiding penalties and sanctions at the same time.
Wishing you a Most Compliant and Productive start-up!