Taxation of Unincorporated Businesses in Nigeria

Dare Onamakinde

INTRODUCTION

Unincorporated businesses are usually the sole proprietorship or the partnership business. They can be defined as a commercial enterprise that is privately owned by one person or more than one person(s), it has unlimited liability due to the fact that the business has not been formally registered as a company. Most of the businesses that are run in Nigeria are in the hands of the sole proprietorship and partnership.

According to investopedia.com, a Sole proprietorship can be defined as a sole trader or a proprietorship, is an unincorporated business that just one owner who pays personal income tax on the profit earned on the business to the relevant tax authority. A sole proprietorship is one the very easy businesses to set up as it is one of the most common form of ownership in Nigeria. The profits and debts incurred in the business are that of the owner alone because the owner exercises total control over the business. Examples of sole proprietorship businesses in Nigeria are Local grocery stores, Wholesalers and Retailers of marketable goods, Nail salons and Barbing salons etc.

According to investopedia.com, a Partnership can be defined as a formal arrangement by two or more parties to manage and operate a business and share its profits. Setting up a partnership business is a little bit more complex than that of a sole proprietor but it is still also easy to set up. The profits and debts are both incurred by the partners in the business depending on the amount each partner invested.

TAXATION OF SOLE PROPRIETORSHIP AND PARTNERSHIP IN NIGERIA

The taxation scheme for both the sole proprietorship and partnership are somewhat similar. Before any business in Nigeria is liable for tax payment, it must get all the necessary documents and ensure that the business owner registers and obtains the Tax Identification Number (TIN) from the State Board Internal Revenue in order to make the necessary payments of taxes such as the Personal Income Tax (PIT), Capital Gains Tax (CGT), Withholding Tax (WHT) and also the Value Added Tax (VAT). The Finance Bill 2020 mandates that before organization or an individual open a bank account( whether an existing account or a new account), the individual or organization must have gotten the Tax Identification Number (TIN).

PERSONAL INCOME TAX

Personal Income Tax (PIT) can be defined as a direct tax that is charged on the income of an individual or a sole proprietor. The Personal Income Tax Act (PITA) as amended in 2011 divided individuals into two groups which are the employees (PAYE) and the self-employed. The study deals with the latter which is the self-employment tax. The self-employment tax is a tax that is paid by either a sole proprietor or a partner based on the amount of profit earned.

Both the Sole proprietor and Partnership business are not liable to pay income tax as an entity but rather they pay income tax on their share of profit after distribution of profit or loss has been made. They are responsible for filing their tax returns themselves and paying the relevant taxes when due according to the provisions of the Personal Income Tax Act (PITA).

A business owner in Nigeria is liable to pay tax in Nigeria for each year of assessment on the aggregate amount for every source of income. This will include profits made from the business, salaries, wages, fees, allowances or any other gains or profit gotten from employment including benefits, compensation.

The following personal reliefs are allowed against a sole proprietor or partner taxable income

ALLOWANCE	AMOUNT
Consolidated Relief allowance (CRA)	Higher of N200,000 or 1% gross emolument plus 20% of gross emolument
Child( must be under 16 years of age or receiving full time education)	N2,500 per child( to a maximum of 4 children)
Dependant relative	N2,000 per relative( to a maximum of 2 relatives)
Life Insurance or deferred annuity premiums	Actual amount of premium for self and spouse
Employed tax payer with disabilities	Greater of 20% of earned income or N3000
Gratuity paid by employer	Actual amount of gratuity received
National Housing Fund Contribution	2.5% of his basic salary
Contribution Pension	8% of gross monthly emolument subject to minimum of basic + housing allowance + transport allowance
Loan Interest paid on owner-occupied residential houses	Actual interest paid

The taxable income left after deducting the relevant allowances shall be subjected to tax. The following tax rates would be applied:

TAXABLE INCOME	TAX RATE	TAX PAYABLE	CUMMULATIVE TAXABLE INCOME	CUMMULATIVE TAX PAYABLE
First N300,000	7%	21,000	<N300,000	N21,000
Next N300,000	11%	33,000	N300,001 – 600,000	N54,000
Next N500,000	15%	75,000	N600,001 – 1,100,000	N129,000
Next N500,000	19%	95,000	N1,100,001- N1,600,000	N224,000
Next N1,600,000	21%	336,000	N1,600,001 – 3,200,000	N560,000
Over N3,200,000	24%

ALLOWABLE DEDUCTIONS UNDER PERSONAL INCOME TAX IN NIGERIA

These can be defined as expenses incurred that are related to the business purpose. PITA provides that all outgoings and expenses wholly, exclusively, necessarily and reasonably incurred during that period and ultimately borne by the business of individuals in the production of their income are deductible in the process of determining the assessable income to be used for tax purposes. They include:

Interest on loan

Rent and rates( must be related to the business)

Bad debts written off

Repairs and maintenance of any asset employed in the business

Contribution to a pension scheme

Provision of doubtful debts of a specific nature

NON ALLOWABLE DEDUCTIONS UNDER PERSONAL INCOME TAX

These can be defined as expenses incurred that are not related to the business purpose. They include

Personal expenses

Capital expenditure

Fines and penalties

Donations

Depreciation of any asset

Any loss or expenses recoverable under insurance

Taxes on income or profits levied in Nigeria

COMPUTATION OF PERSONAL TAX LIABILITY IN NIGERIA

List the earned income from all the sources, such income gotten from employment, business trade, profession and vocation

List the unearned income from all sources such as dividend, rent and interest minus the related expenses to obtain the unearned income

Add the earned income and the unearned income to arrive at the total income

Deduct all the non-taxable income from the taxable income

Grant the capital allowances

Grant all the applicable loss relief and allowances

Then apply the tax rates in the table above to the chargeable income

ILLUSTRATION

Mr. Ekenne is a sole proprietor of the Marvel store Enterprises, and is ordinarily resident in Lagos state but has a place of residence in Osun state, a property that he rented out. The accounts of his business in 2019 were as follows:

₦

Sales 10,497,480

Cost of sales (1,947,460)

Gross profit 8,550,020

Less General expenses (398,061)

Net profit for the year 8,151,959

The following information is also relevant:

General expenses includes the following:

₦

Depreciation of motor van 35,000

Mr. Ekenne personal drawings 30,000

Staff salaries 48,000

School fees for Mr Ekenne’s son 7,500

Donations to Church 40,000

Bad debts written off 12,000

1% provision for doubtful debts 8,050

Refurbishment of gen. set 16,750

Repairs and Maintenance 11,000

Other allowable expenses 189,761

398,061

Marvel Store Enterprises operates principally in Lagos state

The cost of sales includes the cost of goods stolen from the warehouse worth ₦27,000 but it is recoverable from Insurance

Mr. Ekenne received dividend from quoted companies in 2010 amounting to ₦25,075. He also received director’s fees from some of these companies amounting to ₦8,500 in the year 2019

From his property in Osun state, he received gross rent amounting ₦45,000. Repair expenses on the property agreeable with the revenue was ₦2,500 in 2019

Mr. Ekenne has an aged mother in his village whom he maintained with a total of ₦2,000 in 2019. His mother who is a retired school teacher has an annual pension of 600

He estimates that he gave a total of ₦2,600 to roadside beggars in 2019

Capital allowances as agreed with the revenue are: ₦25,000 for his business and ₦18,000 for his property

Compute Mr Ekenne tax liability for the year 2020 and what appropriate tax authority will assess him?

Assume that the rate of withholding tax on dividend and director’s fees to be 15%

Mr. Ekenne

Computation of Tax liability for 2020

₦ ₦

Profits as per accounts 8,151,959

Add non-allowable expenses:

Depreciation 35,000

Drawings 30,000

School fees 7,500

Donations to church 40,000

Provision for doubtful debts 8,050

Refurbishment of generator set 16,750

Goods stolen from warehouse 27000 164,300

Adjusted profit 8,316,259

Less capital allowances (25,000)

Gross Director fees (8500 x 100/85) 10,000

TOTAL EARNED INCOME 8,301,259

Unearned income:

Gross dividend (27075 x 100/85) 29,500

Gross rent 45,000

Less expenses (2500)

Less capital allowance (18,000) 24,500

TOTAL INCOME 8,355,259

Less Gross dividend (29,500)

Assessable income 8,325,759

Less Reliefs:

Personal allowance

5,000 + (20% x 301,500) 65,252

Dependant Relative 1,400 (66,652)

Chargeable income 8,259,107

First N300, 000 at 7% 21,000

Next N300, 000 at 11% 33,000

Next N500, 000 at 15% 75,000

Next N500, 000 at 19% 95,000

Next N1, 600,000 at 21% 336,000

Over N3, 200,000 at 24%(8,259,107 – 3,200,000) 1,214,186

TAX LIABILTY 1,774,186

Withholding tax on Directors Fees (15% x 10,000) (1500)

TAX PAYABLE 1,772,686

Note that Mr. Ekenne has more than one place of residence but since he spends more time in Lagos state and his business operates principally in Lagos state. The relevant tax authority for tax remittance is the Lagos State Internal Revenue Service (LIRS). This applies even though he has another place of residence in Osun state and he derives income from there.

Although, sole proprietors and partners will be required to fill a certain compulsory document called FORM A which is the Income Tax Form for Return of Income and Claims for Allowances and Reliefs. It entails the personal details and the amount of income expected to be earned by the sole proprietor or partner for the current year of assessment. Tax payers are expected to fill and file their form within 3 months from the beginning of each calendar year. Attached in this article is a sample copy of the FORM A.

VALUE ADDED TAX (VAT)

Value Added Tax (VAT) can be defined as a type of indirect tax that is imposed on the supply of goods and services in a given state. VAT is governed by the Value Added Tax Act Cap V1, LFN 2004 as amended. It is mostly eventually borne by the final consumer of the goods and services. VAT in Nigeria was calculated at a flat rate of 5% before the Finance Bill 2020 that was signed in October 2019 by the President amended the rate to 7.5%. Section 7 of the VAT act grants the power of administration of VAT on the Federal Inland Revenue Service (FIRS) in Nigeria.

However, effective February 2020, businesses with Turnover less than N25,000,000 in any given are exempted from charging VAT on theirs services or products. Furthermore, sales by a small business to a big business with a turnover of over N25,000,000 in any given year will still attract the charging VAT by the small business but the payments will made by the big business to the Federal Inland Revenue. The small business eventhough it charged the VAT will not collect it but rely on the big business to deduct at source and make remittance.

Every VAT collected by every business owner must be remitted to the Federal Inland Revenue Service (FIRS) on or before the 21st day of the month following the month the goods and services were sold. That is Value Added Tax (VAT) collected in March must be remitted before the 21st of the following month which is April.

Input VAT

This type of VAT is paid on raw materials, goods are services that will be used for production purposes or goods for resale or goods imported directly for resale. When computing, Input VAT on overheads, services and general administration should be treated as an expenses in the profit and loss account while Input VAT on any capital item and item should be capitalized together with the cost of the item or the asset

Output VAT

This type of VAT is charged on goods and services supplied and it is collected by a supplier from its distributors, agents, clients, consumers on goods and services supplied to them.

When Output Vat is greater than Input VAT, the tax payer is required to remit the excess to the Federal Inland Revenue Service (FIRS) but when the Input VAT is greater than the Output VAT then the tax payer is entitled to a return from the Tax board.

There are exempted goods and services that are not subject to VAT. They include

Medical and Pharmaceutical products

Basic Food items

Sanitary pad (proposed by the Finance bill)

Baby products

Books and educational materials

Fertilizer (locally manufactured), agricultural and veterinary medicine, farming machinery and farming transportation equipment

Medical services

Services rendered by community banks

Plays and performance conducted by the educational institutions as part of learning

Oil exports

CAPITAL GAINS TAX

When a sole proprietor or partnership business sells an asset and make gain on the sale of the asset, the business must pay 10% of the chargeable gains made from the sale of the asset. The capital gains is the difference between the sales proceeds from the sale of an asset.

ASSETS CHRGEABLE UNDER CAPITAL GAINS TAX

Options, debts, and incorporeal property

Any currency other than the Nigerian currency

Any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired

Assets situated outside Nigeria

EXPENDITURES ALLOWABLE FOR DEDUCTION FROM THE SALES CONSIDERATION

Expenditure wholly, exclusively and necessarily incurred for the acquisition of the asset

Incidental cost on the acquisition of the assets

Expenditure wholly, exclusively and necessarily incurred in enhancing the values for the assets of the disposal

Expenditure incurred on asset for the purpose of establishing, preserving or defending the title or right over an asset

Incidental cost of making the disposal

GAINS NOT CHARGEABLE

Section 26 of the Capital Gains Tax Act in Nigeria exempt some capital gains from taxation. They are:

Gains of ecclesiastical, charitable or educational institutions, statutory and diplomatic bodies are exempt from such taxation

Where trustees or nominees transfer assets to beneficiaries they are not considered to be disposing the asset, hence the transaction does not attract Capital gain tax (CGT)

Gains made upon a disposal of business assets where the proceeds are now spent in acquiring new business assets

WITHHOLDING TAX (WHT) IN NIGERIA

Withholding tax (WHT) can be defined as an advance and indirect source of taxation deducted at source from the invoices of the tax payer. The main purpose of the withholding tax is to capture as tax payers might have evaded. Withholding tax rate are usually 10% or 15% depending on the type of transaction carried out. Withholding tax can also be said to be an advance payment of income tax. The WHT tax must be remitted to the relevant tax authorities on or before the 21st day of the month following the month in which the deductions were made.

When a business or an individual supplies goods or services to another company, there will be an evidence of payment which is known as an invoice in the course of the transaction. Take for example, the amount paid by the person who is purchasing the goods is N5, 000,000 and the relevant tax rate is 10%, then upon payment the person purchasing the goods will deduct N500,000 from the invoice of the supplier and then remit it to the relevant tax authority.

The person purchasing the goods is meant to acquire an evidence of remittance of tax payment in the form of a withholding tax credit on behalf of the supplier where he purchased the goods from. The supplier can then use the Withholding tax credit to reduce the income tax payable for the year.

RELEVANT DOCUMENTS NEEDED FOR FILING WITHHOLDING TAX RETURNS

Evidence of payment from transaction such a bank teller or an electronic receipt

Schedule of WHT deducted indicating the : Name of the supplier or vendor, Tax Payer Identification Number (TIN) of the company or individual (supplier or vendor ) from which the tax was withheld and the remaining amount

Source: firs.gov.ng

Withholding tax is applicable on some type of transactions as indicated below:

WITHHOLDING TAX RATES IN NIGERIA

Types of Payment	Withholding Tax rate for companies	Withholding tax rate for individuals
Dividend, Interest and Rent	10%	10%
Director Fees	–	10%
Hire of equipment	10%	10%
Royalties	10%	5%
Commission, Consultancy, Technical and service fees	10%	5%
Management fees	10%	5%
Construction (Roads, Buildings and Bridges)	2.5%	5%
Contracts other than sales in the ordinary course of a business	5%	5%

The penalty or the failure of a business to remit its Withholding tax (WHT) as at when due is 10% of the amount not deducted or remitted. Most companies are ignorant and most times pay double taxes. That is why a business should always engage with a consultant before taking some certain measures. This is because Withholding tax (WHT) credit note can be used to offset the income tax liability for the year

CONCLUSION

If you are a Sole Proprietor,in partnerships, your business profits are not chargeable to tax. It is the share of profit gotten from the sole proprietorship or partnership that is chargeable to tax. Therefore, sole proprietorship and partnership businesses must ensure compliance with all tax related payments. The best way to avoid double taxation or reduce the income tax liability of a business is by hiring a professional consultant who has a good knowledge of the tax system in Nigeria. The consultant will help in conducting these various payments and also giving the right advice when needed to help the business grow, avoid penalties and fines. Embracing and applying the knowledge in this article will also help in the long term success of the business.

To learn more about how we can help meet your tax obligation as an Unincorporated Business or Partnership, please call 08023200801, 08075765799 or email enquiry@matogconsulting.com.

Onamakinde Dare Daniel is a recent graduate of Obafemi Awolowo University with a Bachelor’s degree in Management and Accounting. He is an accountant who has passion for tax matters due to its ever dynamic nature. He hopes to build a career in taxation and he’s currently serving as an intern at Matog consulting Ikeja.