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Finance Act 2020: Tax Implications for Small Businesses

There is good news for you if you are a small business owner. The Finance Act 2020 attempts to reduce the tax burden of small business owners through income tax and value-added tax exemptions.  Over the years, several surveys on the problems of Micro, Small and Medium Enterprises (MSMEs) have identified tax burden as one of the major challenges of small business owners in Nigeria.  It is expected that with one of the burdens removed, small businesses should thrive better in terms of growth and sustainability.

 

Income Tax

With effect from February 1, 2020, if your company’s annual turnover/sales/revenue is less than N25m, then you are exempted from paying income tax on its profit. This does not remove the need to keep proper and adequate accounting records. You are still to file annual tax returns with the tax authority, accompanied by audited financial statements, but income tax payable will be at zero per cent.

If your company’s turnover is between N25m and N100m, then it is regarded as a medium company and income tax rate is 20%, instead of 30% before the Act.  Companies with turnover above N100m are large companies and will continue to pay company income tax at the rate of 30%.

Withholding tax, being an advance income tax, may not be deducted from your invoices by suppliers since you are exempted from paying income tax.  However, if suppliers deduct withholding tax from your invoices when your turnover is less than N25m, then you can note and document it and ask for refund subsequently from the Federal Internal Revenue Service (FIRS).

 

Value Added Tax (VAT)

If your company’s annual turnover is less than N25m, then you will not register as VAT Agent, and will, therefore, not add VAT to your invoices effective February 1, 2020.  The implication of this is that without adding VAT, prices of your goods and services will become cheaper and affordable by many more people, and this will lead to more sales and eventually more profit.  Though implementation details and guidelines are not yet out, it is likely that a taxpayer that registered for VAT when turnover was more than N25m can be deregistered if turnover falls below the threshold.

The most popular provision of the Act seems to be the increase in the VAT rate from 5% to 7.5%. This increase affects everybody who consumes vatable goods and services.

Tax identification number (TIN) is compulsory for individuals and companies – small or large.  The requirement not to register for VAT for companies with turnover less than N25m does not apply to the acquisition of TIN.  In addition, whether you are registered for VAT or not, you pay VAT when you consume vatable goods and services. But because you are exempted from VAT registration based on your turnover is less than N25m, the VAT paid will be expensed because you cannot offset it. Exemption from VAT payment is for some goods and services and not for persons or companies.

 

Going Forward

The time for small businesses that operate as enterprises to be registered as limited liability companies is now. This will enable them to take advantage of the Finance Act’s reduction of company income tax rate to zero per cent and 20 per cent based on their annual turnover.

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