15th July, 2020
By Julius Masaba
In this article, I will to tell you a little about a tax compliance (or non-compliance) case of an ordinary business in Uganda, the problems or challenges such businesses face and what they do to try and ‘dodge’ taxes. I will also provide you with a few tips on how to pay less tax to avoid huge penalties without necessarily evading the tax man.
In 2015, a relative of mine owned a photography business (which is still in operation). He approached me one time about his business’s tax issues a few months after meeting him at a family wedding meeting at Buganda Road Primary School that year.
About his business, he said he had a TIN but he was being bothered by the unending Uganda Revenue Authority (URA) reminders on filing taxes. You know those reminder emails about tax filing, then a reminder about the first reminder and a final reminder about a previous reminder.
Ideally, they had been sending him reminders since 2014. When he registered business in 2010, he took two years to commence business. So, all those years (but especially starting 2014), he wasn’t paying or filing any tax or returns. Obviously, he was not making profits yet, so he saw no need filing in the first place.
Mistake #1: Not filing returns (nil returns) even when not making profits.
Solution: You should make sure you file nil returns even if you are not yet making any profits (or not yet attained break-even point). It’s a different case if you have not commenced business.
Most of the reminders were about income tax – for the company and the directors (final and provisional) and value added tax (VAT). The problem he had was not taking steps to address it. He was told that he doesn’t qualify for some taxes but needed to file those that were nil (if any).
The company had (or has) two directors but they too were not filing returns, plus they were not getting a monthly salary as staff or any allowances for being part and parcel of the directorship.
Mistake #2: Not remunerating directors or not adding them to the company payroll as staff.
Solution: As company owner or director, always pay yourself as an employee. It avoids drawing money from the company’s account.
The business/company did not have full time or permanent staff too, so most of them were contractors. Now the issue is, they too were not paying tax – withholding tax (WHT) and for that case, the company was not remitting it to the tax body.
Mistake #3: Not putting withholding tax (WHT) in consideration.
Solution: Withholding tax (WHT) is charged for any services and some goods supplied. So, the transactional documents should have the WHT provision and the other party should be aware of it.
Also note that contracted persons are also liable to Local Service Tax (LST) levied by Kampala Capital City Authority (KCCA), on their income/pay.
Another advantage he had was that he was not eligible for social security (NSSF) contribution since he had no permanent staff or not even five (5) in number. Though currently there is voluntary membership, it would still be a personal decision of the contracted personnel.
Now concerning the reminders about income tax and filing of other taxes, we had agreed on what next. Actually, he had accumulated some penalties for non-payment and they needed him to pay. However, we had to first look at the monthly returns (and if it was possible to pay part).
The fact that the key items that were needed for this – income/revenue/sales, expenses, and capital expenditure (asset purchases), etc. were lacking or not in order, we couldn’t go on with the work of establishing the actual tax he would have to pay as part of the penalty clearance.
He had very disorganized accounts or financial information. To make it worse, there were no monthly management and financial accounts ever prepared since serious business commenced.
Mistake #4: Poor or completely no bookkeeping (poor record keeping).
Solution: The least you can do is have a manual system of keeping business and financial records on sales/revenue, expenses, etc. You can then transfer those records to an electronic system like Excel or software like Tally, QuickBooks, Xero, etc.
But why do you need bookkeeping?
- To improve financial analysis and management by keeping track of your expenses and revenues (outflows and inflows) of cash.
- It’s a requirement by the law to keep all your financial dealings, right from your big to the small invoices. It helps during auditing.
- Helps you in making informed business plans. Based on the information you have; it can help you make decisions on whether to look for extra financing or not.
- You enjoy easy reporting to investors. You don’t need to worry about reporting to investors and showing financial status of your company once your records are well kept.
- Helps in fulfilling tax obligations on time; by keeping all information and documents needed to accomplish your periodic tax filing. When deadlines are closer, you don’t have to rush everywhere looking for receipts, and invoices, etc. Your tax adviser can also finally give you some sound tax advice instead, correcting incorrect entries in your financial statements.
- You also need audited financial accounts to be able to apply for listing with other bodies like Public Procurement & Disposal of Public Assets Authority (PPDA). You need to submit such accounts for the past two (2) years.
Mistake #5: Not preparing financial or management accounts periodically and consistently.
Solution: Outsource bookkeeping and accounting work to a professional consulting or accounting firm or person. This way, you can always keep the financial aspects of your business intact and organized.
When you have such well-kept records, you are able to start preparing monthly, quarterly, half yearly and annual financial accounts. An organised set of balance sheet, profit & loss and cash flows also makes filing your returns easier. You won’t know how much you spend or make if you have no summarized accounts as per accounting standards.
Bookkeeping can show you the difference between bankruptcy and success, saving thousands of shillings for your company. For smaller or young businesses, outsourcing accounting work also saves costs compared to having an in-house bookkeeper or accountant – you save on salaries, welfare (feeding, transport, and medical) and space.
From my experience preparing financial and management accounts, clients or business owners usually want to know two (2) things;
- How much profit did I make? So, accounts provide profit & loss (P&L) account split into areas: revenues/sales, cost of sales, operating expenses, profit before tax (PBT) and profit after tax (PAT).
- How much is my business really worth? Accounts are prepared to provide a summarized balance sheet that ‘balances’ basing on the accounting equation Total Assets – Total Liabilities = Equity.
So, we agreed that we would have a pro bono arrangement where I will be preparing the management accounts and also file the monthly returns. However, it took forever for him to embark on the task of bookkeeping and putting all the needed information right.
We both went into limbo – but for my case, I had a lot of other pressing engagements. Unfortunately, he passed on earlier this year minus accomplishing what we had set out to do four, five years ago.
Now the skeletons of that unaccomplished work came back to haunt the current company management. I was not spared either. URA kept sending tax filing notifications, reminders and penalties for over three (3) years till they gave up. The TIN was eventually blocked or deactivated.
So, when I sat with one of the directors, we tried all means possible to access or re-activate it but failed; till we contacted URA staff. We were told the TIN is still functional/valid but need to re-activate it by re-applying, which we did. In the second last week of June, we succeeded. Reason for reactivation was ‘Resumed Business’.
Developing a tax compliance rather than evasion culture
Tax is a quid pro quo payment. That is, something is given to you in return for something you did. In a state, its public goods and services in return for taxes you pay, respectively. In Uganda, tax compliance enforcement is a big challenge to the taxman.
URA faces a lot of problems in trying to tell or make businesses pay taxes, in fact a huge task of widening the tax base. This has led to revenue collection shortfalls and deficits. Even with penalties and fines, it’s a tag of war ensuring businesses meet their side of the bargain.
The just concluded financial year saw URA with a revenue deficit of close to UGX2.9 trillion – from non-compliance and partly informal or unregistered businesses. Read about court orders beer firm to pay URA about UGX9.7 billion in tax arrears.
Paying taxes is an ethical act. Even Jesus said you ought to pay Caesar what belongs to him. God also taxes you through tithe. So, simply pay the damn tax! Trying to evade or dodge tax is unlawful and morally wrong. It’s an act of disobeying authority.
Many Ugandans actually dodge taxes one way or the other, even when they peacefully asked for or applied for a TIN. My friend, when you have that TIN, the taxman will at any one time knock on your door. It’s true that many young businesses don’t make profits immediately in the short run (1st, 2nd, 3rd year or more).
This has sparked a debate in the circles of most young businesses or startups asking why such businesses can not enjoy tax exemptions in their early years and yet big foreign owned companies are given huge tax holidays and reliefs of five, ten years or even more.
Businesses that are unable to pay taxes end up willfully evading or, due to overwhelming penalties end up ignoring the reminders and threats. I can refer to the story above. We realized, after checking through the past emails from URA that the tax penalties had risen from UGX2 million to UGX3.5 million or so.
Had the taxman been serious with knocking on the door, roaming around and seeking who to devour, my relative would have fallen prey. Tax administration is also expensive. The taxman would find it hectic visiting physical offices of businesses, looking at taxpayers’ books or financial information and deciding on what amount they should pay.
Worse still, many businesses are existent and formal but their physical addresses or locations are hard to find. If URA was to be tough, many businesses would be in the frying pan. The idea of ‘cutting corners’ to evade tax would be no more.
So, how should we be tax compliant?
Below I have given a few tips not only on how not to completely evade taxes but also on how to avoid penalties and keep the taxman at bay. We are talking about exploiting some of the loopholes in the system to pay less tax.
- File Nil Returns: It sounds funny but filing nil returns is acceptable. This is not just because you have not yet started making any profits. If you file such returns, it saves you penalties that are often just assumed or estimated by the taxman.
- File Provisional Returns: Provisional tax filing allows you to pay your business taxes in piece meal or instalments in the course of the financial year of business. You base on your recent tax submissions.
For a business, the provisional returns have to be filed within six (6) months after your business’s financial year has started. It’s paid in two (2) instalments, on or before the last day of the sixth (6th) month or the twelve (12th) month of your business year.
This arrangement allows you and your business to not feel the pressure of last-minute tax payment (thereby averting penalties).
Remember, the taxman has powers to estimate your business’s gross turnover or chargeable income for a year of business if you fail to do a provisional tax return. This estimated tax is based on judgment – and it can be higher than what you should have paid.
- File Presumptive Tax Returns: This one allows a taxpayer or business to adjust in their income tax return that was submitted to the tax body previously.
The threshold for such payers is UGX150 million but depending on the location and nature of the business, the rage for presumptive tax is UGX10 million to UGX50 million as annual income.
There are other terms applicable if your business’s annual income is above UGX50 million but not exceeding UGX150 million.
A business is liable to a penal tax which is the higher of 2% of the tax assessed or UGX200,000 monthly for the period the return has been outstanding, if you fail to file the return by the due date.
The advantage with this tax filing is that the business can seek to be assessed on profits instead of total revenue or sales; but you must write to the Commissioner Domestic Taxes with clear reasons on top of having your financial statements well prepared.
It’s also a final tax where no tax credit is allowed to offset another tax liability, unless the tax was withheld on the sales made (revenue) and if an amount was paid as provisional tax during the business year.
- Take advantage of Excise Return Filing: If you’re a manufacturer or supplier in Uganda, you need to furnish the tax body with excise returns (from excise duty) for locally made goods or imported ones and provision of specific services in Uganda.
Such a tax is paid on ex-factory price of specific locally manufactured good. This price has raw material costs, direct labour cost, non-production costs plus profit. Manufacturers must be licenced by the tax body for regulation and management purposes and the licence is usually for one (1) year and renewable.
You have to submit the returns by the twenty-first (21st) day of the new month – the month after the one in which the payment for the goods or services was made. This tax works well under the East African Excise Management Act and the rates are applicable in the Excise Tariff Act of Uganda law as amended.
The advantage with this duty/tax is that it can be waived or exempted in cases where the goods are exported and where the goods are being returned to the factory (like in return in-wards).
Some of the taxes that are withheld on behalf of the tax body (URA) include PAYE – collected from every qualifying employee by the employer on every month and submitted to the body, WHT and others.
Did you know?
You are a tax agent to the tax body if you collect tax on its behalf – which most persons and businesses actually are. Mostly for some of the taxes mentioned above.
WHT is furnished by a withholding agent for amounts deducted as tax before making a payment to another person for taxable goods supplied or services offered. It’s supposed to be filed within fifteen (15) days after the end of the month in which the payment was made.
If you (as an agent) fail to withhold the tax, you are liable to pay the unpaid withheld tax to the tax body. So be vigilant too, to avoid penalties. That unpaid withheld tax will be collected from you as if it was due from you (as the tax agent) plus any accrued interest on it.
- Outsource Tax Filing Work: Today’s tax laws are quite complicated than ever before. Less experienced preparers will overlook credits and deductions that you may be entitled to. If you have unskilled persons to file your taxes, you may end up losing money on the table.
I have filed tax returns for and offered related advice to a few clients as well as accounting preparation services. Outsourcing tax filing services will give you and your business better productivity by freeing your engaged resources and thus you can be able to engage on better customer services.
Overall, timely tax payment enables you or your business to avoid heavy fines and penalties and subsequently any legal issues. It also helps the business to able to identify risks in operations, risks that could affect the entity’s risk rating scale with the tax body.
It can be a good basis on which to bank on while requesting for tax refunds in case you want a cash refund for excess taxes paid.
If you think I could be of help to you now or later, let me know through my WhatsApp contact or leave a comment at the bottom of this article or a message in the ‘Contact Me’ page. Distance is not a barrier.
My process is simple;
- You can send scanned documents (Excel preferred) with the relevant data and it will be entered into the tax system by use of templates or forms for processing, after proof checking or auditing it.
- Generate a copy, report or results and send them to you (client) for review, look out for any missing information, ask questions and request for modifications as you might need or as might be required.
- Submit a generated a copy, report or results to you (client) after confirming review of the tax returns; I update the file and send you the final copy for filing before the due date. You can then go on to pay your taxes in cash over the bank counter or other electronic means.
Don’t forget to read the URA tax amendments 2020/2021
Wising you a new year of tax compliance!
NB: This article also appeared on Medium by the same author. Click here.
About the Writer
Julius Masaba is a private investment researcher and business consultant. He’s also the Business Development Lead at Ablestate, https://www.theablestate.com/ and a WordPress writer/blogger on startups, entrepreneurship, business and finance. He loves tech. Visit: https://consultmasaba.com/