In Summary

Some Small and Medium Enterprises think they are too small to come into the tax net. Most think 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, Sophie M. Kayemba writes.

Are you running a small business somewhere in Uganda? Be it a shop somewhere downtown, a farm upcountry or a fast food joint? 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 you just do not want to or don’t even know about them?

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

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

Some Small and Medium Enterprises (SMEs) think they are too small to come into the tax net. Most think 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.

There are several ways in which URA can know about your business although you don’t tell them. According to its Annual Revenue Performance Report for FY 2017/18, in FY 2017/18, the URA undertook a number of initiatives to increase tax compliance. These initiatives led to an increase in the number of registered taxpayers by 28.3 per cent from over 1 billion taxpayers in FY 2016/17 to over 1.3 billion taxpayers in FY 2017/18. It also recovered tax arrears of Shs598.46 billion from taxpayers resulting from under declaration, misdeclaration and concealment of income among others.

As a business owner, you should know what tax compliance obligations you have and how to avoid the pitfalls of non-compliance. Here are five tips that you can follow:

If you don’t already have one then you need to register for a Tax Identification Number (TIN). If you hire employees, register for Pay As You Earn (PAYE). If you make a payment subject to Value Added Tax (VAT), which will happen when you supply goods and services which are not exempt from VAT and your annual sales are expected to exceed Shs150 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 not the case. 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.

Keep records
Secondly, start keeping records from day one. 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.” You may remember how much money your business made or what your business expenses are today. But what about say in six months, a year, or three 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.

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.

Know your taxes
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, how and where you should be filing your tax returns as well as making your tax payments.

Why? 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.

Hire a tax professional to advise you or talk to the URA.

If your annual sales turnover is less than Shs150 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 per cent 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.

If you operate a restaurant in Ntinda, a Kampala surburb, and your annual revenue is Shs45 million and your business expenses are Shs50 million, you are required to pay a minimum tax of Shs550,000 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 since you will have a tax loss of Shs5 million. You will be allowed to carry this tax loss forward to the next year.

Tax leakages
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.

Any business owner owes it to him/herself to run a successful business without incurring unnecessary expenses. 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 but tax efficiency.

Talk to URA
Whereas you can run from other people you owe money, 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, tearing it up, or dumping it in the bin just because you disagree with what they are saying does not take the problem away.

Instead, engage with the URA and understand why they are saying what they are saying. Sometimes they are right, and sometimes they are wrong. If you can appeal to the Tax Appeals Tribunal, which is a separate and independent authority to review the matter. You can also hire a tax professional who can liaise with URA on your behalf.

The author is the manager tax services at PricewaterhouseCoopers Uganda