Navigating tax compliance for start-ups and SMEs in Nigeria

Nigeria’s entrepreneurial ecosystem is at the forefront of setting startups and SMEs (small and midsize enterprises) as vital contributors to its economy. These businesses play a crucial role in the creation of jobs, innovation, and diversification of the economy. One of the biggest headaches they experience, however, is navigating the complex landscape of tax compliance.

Of course, for many entrepreneurs in Nigeria, the subject of tax compliance has not been very easy. It is usually a very overwhelming topic with administrative procedures, fear of punishment, and confusion over what the law says or does not say.

However, more benefits come from complying with the tax even though it comes with its fair share of challenges. Compliance not only ensures avoidance of legal repercussions but also unlocks opportunities like access to credit facilities, eligibility for government contracts, and a good reputation in the business environment.

This article will guide you through some key steps that are required to ensure your start-up or SME in Nigeria is compliant on issues related to taxes. This is right from understanding the requirements for registration, accurate record keeping, and filing of your tax return.

Demystifying Tax Registration

Obtaining a Tax Identification Number (TIN) is one of the very important first steps to ensuring any business in Nigeria is compliant with tax matters at large. The TIN is a unique identifier number issued by the Federal Inland Revenue Service and serves as basic material necessary for fulfilling every obligation due from a taxpayer.

Why is a TIN important?

The TIN is more than a formal registration number as it stands for the transparency and accountability of your business. It is a legal requirement for every businessman operating in Nigeria, whatever the size. This allows your start-up or SME to interact with government agencies, open corporate bank accounts, and be recognized as a formal business entity.

Steps to Register for a TIN

TIN registration is relatively easy to get. On your request, the FIRS can even make options available online or offline to make it easier for businesses. Here’s how one registers:

• Application Online: Application for TIN can be done online through the e-service platform of FIRS. You log on to the FIRS official website, create an account, and start an application for TIN. After the form is submitted with the attached documents, the issuance of TIN takes a few business days.
• Application Offline: You can also make the application for a TIN from the nearest FIRS office. You will be required to fill out a form and attach supporting documents, such as a Business Registration Certificate from the Corporate Affairs Commission.

Record Keeping: Why It’s Important

It is important, right from the start of the business, that financial records be maintained, showing income, expenses, invoices, and receipts. Good documentation not only makes your process of paying taxes easier but also aids you in audits or inquiries by the tax authorities. Good record-keeping acts as proof for claims, deductions, and liabilities made when filing returns.

Knowing Which Taxes Are Applicable To Startups And SMEs

It is very important, upon registration of your business, to know the types of taxes to be paid. In Nigeria, there are various taxes imposed on startups and SMEs for payment, and this is administered by FIRS. Understanding what taxes apply to your business will keep you compliant and help you avoid penalties.

Federal Taxes

Company Income Tax: This is a tax charged on the profits of registered companies in Nigeria. For startups and SMEs, the rate for CIT is 20% when the company’s annual turnover falls between N25 million and N100 million. Immediately this goes over N100 million, then the percentage increases to 30%. Filing returns for CIT is important yearly, even when your business is not yet profitable, to avoid fines.

Value Added Tax: This is the consumption tax levied on goods and services in Nigeria. Any business whose turnover is more than a threshold amount must register for the VAT. Taking an online casino or any e-commerce website as an example, such businesses are supposed to register for a VAT if the threshold for their turnovers is exceeded. This is a value-added tax charged at 7.5%, which the business has to collect and pay into FIRS on a monthly basis. Filing a VAT return is required even when your business didn’t generate taxable sales for the period.

Tax Filing and Record-Keeping

A major part of compliance is the filing of tax returns. Filing on time keeps you in good books with the FIRS and protects your businesses from penalties, interest, and sometimes litigation.

Why Timely Filing is Important

The FIRS requires businesses to file their tax returns within the stipulated deadlines. In the case of Company Income Tax, the return shall be filed within six months of the company’s financial year-end. Value Added Tax returns shall be filed on or before the 21st day of every month. Failure to comply may invite severe penalties, which would, of course, not go well for startups and SMEs.

Documents Required to File the Returns

The following are the commonly required documents at the time of filing returns:

• Financial reports: income statement, balance sheet
• Records of VAT collected and remitted
• Proof of payment of taxes
• Supporting documentation of deductions and exemptions

Records kept accurately and organized throughout the year will considerably simplify the filing process and reduce the risk of errors.

Benefits of Tax Compliance

The advantages accruing to a startup or SME from tax compliance go beyond just being at peace with the relevant authorities. There are several tangible benefits of ensuring that this compliance is maintained, which include:

1. Accessibility of Credit

Lenders often need proof of tax compliance in various applications for loans or any other financial deal. A good tax history will build up your company’s creditworthiness and will result in a successful application for funds when needed.

2. Government Contracts

Tax compliance is an eligibility criterion for the tendering process in most government contracts. In fact, numerous public sector opportunities present themselves to those businesses which, in one way or another, prove that they have met their tax obligations. Truly compliant businesses stand a better chance of securing lucrative contracts that create significant growth opportunities.

3. Avoidance of Interest and Penalties

Failure to comply results in enormous financial fines, which may include interest for non-payment of taxes and possible legal action. In other cases, there are chances of disruption of a business due to account freezing for failure to pay tax dues. With compliance, these are risks you avoid, and you have a smooth running of your operations.

Seeking Professional Help

While many startups and SMEs can be able to organize their taxes independently, there might simply be myriad instances when the service of a professional is sheer gold.

In this regard, engagements with tax professionals and consultants will help navigate complex tax issues, take advantage of deductions, and ensure full compliance with Nigerian tax laws. They also help streamline your tax filings, and this gives you the extra time you need to concentrate on building your business.

Conclusion

In Nigeria, compliance with taxation remains a key responsibility for both startups and SMEs. Once a business is registered for a TIN, understands all the various taxes that apply to its operation, keeps financial records, and files returns on time, then it will be considered as being in compliance and shall enjoy many benefits. Compliance unlocks credit facilities to businesses, government contracts, and saves your company from facing the pains of penalties that deter growth.