Tax compliance guidelines

Tax compliance guidelines for Small and Medium Enterprises

Are you running a small business somewhere in Uganda? Be it a shop somewhere downtown, a farm upcountry, a fast food joint, and so on…

Are you familiar with your tax compliance requirements? Are you registered for taxes? Do you know the taxes you are registered for? What about those taxes you are probably required to register for but for one reason or another, you just do not want to or worst still you don’t even know about them

Have you ever received a notice from the URA reminding you about an upcoming tax return filing deadline, or tax liabilities you have not cleared, or intention to close your business, or any matter?

The annual income tax return for the last financial year (FY) ended 30 June 2018 was due by 31 December 2018. Did you file it? If your tax year end is 31 December, you annual income tax return for the period ending 31 December 2018 is due for filing by 30 June 2019. Are you ready to file it?

I am asking you these questions so you can ponder over them. Can you confidently answer “Yes” to all these questions?

Some Small and Medium Enterprises (SMEs) think they are too small to come into the tax net. Most think that the URA has bigger fish to chase in terms of large tax payers and will not bother looking into the affairs of a small business somewhere. If you think like this, it is time to think again.

The URA is now more awake, agile and better equipped than ever before. There are a number of ways in which the URA can know about your business even without you telling them. According to its Annual Revenue Performance Report for FY 2017/18, in FY 2017/18, the URA undertook a number of initiatives aimed at increasing tax compliance. These initiatives led to an increase in the number of registered taxpayers by 28.3% from over 1 billion taxpayers in FY 2016/17 to over 1.3 billion taxpayers in FY 2017/18; and even recovered tax arrears of UGX 598.46 billion from taxpayers resulting from under declaration, misdeclaration, and concealment of income and so on.

I am not saying all this to scare you. Instead, I am trying to challenge you as a business owner to know what tax compliance obligations you have and how to avoid the pitfalls of non-compliance. Here are 5 tips that you can follow:

First of all, as a business, if you don’t already have one then you need to register for a TIN. If you hire employees, register for Pay As You Earn (PAYE). If you make a payment subject to VAT, which will happen when you supply goods and services which are not exempt from VAT and your annual sales are expected to exceed UGX 150 million, then register for VAT. If your business becomes eligible for a certain tax when it already has a TIN, you will need to change the entity’s tax registration details.  

Some business owners think they only need to register their business for taxes only when the business starts making a lot of money and is profitable. This is definitely not the case. Here is why?

  • You may not be able to utilise the losses the business incurred before it started making a profit if you did not file income tax returns previously. This is because your business could have been allowed to deduct the tax losses it had incurred in previous years against the tax profit (chargeable income) for the current year, so that it pays less tax or even no tax at all in the current year;
  • If VAT registration was necessary, the business will not be able to claim a credit (a deduction against VAT on sales) for the VAT incurred on purchases of certain goods and for all services incurred before VAT registration except if the VAT relates to capital goods such as machines incurred less than 6 months before VAT registration, and these capital goods must still be on hand on the day you apply for VAT registration;
  • There is even a penalty of the higher of twice the tax you failed to pay when not registered for taxes, or UGX 1 million.

Secondly, start keeping records from day 1. Many people walk away without a receipt when they buy something; and when they sell something, they do not bother issuing an invoice or cash receipt. Some even say, “I know how much money I make and how much I spend. It’s all in my head.”  You may remember how much money your business made or what your business expenses are today. But what about say in 6 months? In 1 year? In 3 years?

Keeping correct financial records for your business is a mandatory requirement in the Tax Procedures Code Act, 2014. Why is record keeping important?

  • If you do not keep proper records, you cannot pay the right taxes. You may end up over paying (tax leakage) or under paying your taxes;
  • You also cannot provide proof for your business expenses and therefore will not be entitled to claim a deduction for these expenses against your income. This means you could end up paying more tax than you should be paying;
  • The URA also imposes penalties for failure to maintain proper records. The penalty is double the amount of tax payable as a result of the failure to maintain records.

To avoid these pitfalls, for the start, get and keep all receipts for all your business purchases however small they may seem, and issue proper invoices for all your sales. You need to keep these records for a minimum of 5 years. Depending on the size of your business, you may need to prepare financial statements and have them audited by an external and independent certified public auditor.

Thirdly, know your taxes. This means know which taxes your business is liable to and why. Know which taxes your business is not liable to and why. Know when your taxes are due for filing and payment, and how and where you should be filing your tax returns and making your tax payments. Why do you need to know all this?

The answer is very simple. Ignorance is no defence; and this applies to the tax law too. Unfortunately, telling the URA that you did not know that VAT, or PAYE or withholding tax applied on a payment you made or a sale you made does not take away the tax liability including penalties and interest for non-compliance.

This is not to say become a tax professional. All you need to do is either hire a tax professional to advise you and help you, or even more, talk to the URA. The URA will not charge you for asking those questions.

If your annual sales turnover is less than UGX 150 million, then regardless of the expenses your business incurs, you may not be allowed to claim those expenses unless you notify the Commissioner of the URA that you intend to claim a deduction for your business expenses and pay tax 30% on any tax profits made. Otherwise, you may be subject to a minimum tax. This minimum tax is a final tax and varies depending on your annual turnover, the type of business, and where your business is located. The income tax rates for small business taxpayers are listed in the Second Schedule of the Income Tax Act, Cap 340.

Take for example, if you operate a restaurant in Ntinda, a Kampala surburb, and your annual revenue is UGX 45 million and your business expenses are UGX 50 million, you are required to pay a minimum tax of UGX 550,000 unless you notify the URA to allow you to claim your business expenses. Once you notify the URA, you will be allowed to claim your expenses meaning that you will not have any income tax payable tax since you will have a tax loss of UGX 5 million. Moreover, you will be allowed to carry this tax loss forward to the next year.

Therefore, it is important to know how best to minimise your tax leakages, and this brings me to the next tip.

Know your tax leakages. Simply put, a tax leakage is like a hole in a bucket filled with water. Are you paying more taxes than you should be paying? If yes, then you have a tax leakage.

As a business owner, you owe it to yourself to run a successful business without incurring unnecessary expenses; and this includes unnecessary tax payments such as penalties and interest for noncompliance, and other excessive and unnecessary income tax payments which put you in a tax refund position. When you over pay tax, you are lending money to the URA. You do not earn any interest on this money from the URA except in specific instances. Often times, it takes a tax professional to advise you on whether you are paying more taxes than you should be paying and how best to contain your tax leakages. This is not tax evasion. It is called tax efficiency. After all, you are not running a charity.

Lastly, talk to the URA. Whereas you can run from other people you owe money, unfortunately you cannot run from the URA. You may run; but you cannot hide forever.

When you receive a notice from the URA stating that you owe some taxes, ignoring the notice, or tearing it up, or dumping it in the bin just because you disagree with what they are saying does not make the problem go away.

It is advisable to engage with the URA and understand why they are saying what they are saying. Sometimes they are right, and sometimes they are wrong. Circumstances may differ but in most cases, if you fail to agree with the URA, there are other procedures and measures you can take such as appealing to the Tax Appeals Tribunal, which is a separate and independent authority to review the matter. But if you are not comfortable talking to the URA, then hire a tax professional who can help you liaise with the URA on your behalf.

By Sophie M. Kayemba
Manager Tax services at PwC Uganda


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