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Financial Literacy

Withholding Tax: Beginners’ Guide For Small Businesses in Nigeria

Beginners’ Guide For Small Businesses on Withholding Tax in Nigeria

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FIRS could seal your office if you get these two notices

Whether you are opting out of a paid job to run your own business, or you are entering into business with zero employment experience; one thing is certain: you are becoming an administrator and a business leader if you scale through. As such, it is required that you perform some managerial  obligations in the best interest of your business.

This is to expertly prevent you suffering undue charges in the long run. One of such obligations is the issue of Withholding Tax that comes in various ways. Here is a comprehensive guide detailing all you need to know about Withholding Tax in Nigeria.

What is a Withholding Tax?

A withholding tax is basically an advance and indirect source of taxation deducted at source from the invoices of the tax payer. It’s main purpose is to capture as much tax payers that may have evaded tax into the tax net. Withholding tax rates are usually 10% or 5% depending on the type of transaction and collecting authority for the tax (which can be a Federal Inland Revenue or the State Inland Revenue).

[ALSO READ: A legal view of corporate taxation in Nigeria]

Withholding tax

[ALSO READ: Taxes you need to be aware of if you are about to start a business]

How Does it work?

When a company or individual supplies goods or services to another company an invoice will usually be issued as evidence of a transaction. If for example the amount payable by the purchaser is N1million at the relevant tax rate is 10% then upon payment the purchaser will deduct N100,000 from the invoice of the supplier and then remit to the relevant tax authority.

The Purchaser is also obligated to obtain evidence of remittance in the form of a withholding tax credit note on behalf of the supplier. The Supplier can now use the tax credit not to reduce any income tax payable at the end of his year of assessment.

How do I use a WHT Note to reduce my income taxes?

WHT is an advance payment of your income tax, therefore if at the end of a financial year your tax payable is N500,000.00 and an aggregate of all your WHT credit note is N200,000.00, the net tax you will pay to the government will be N300,000.00. That is why it is important to keep your WHT Note.

withholding tax 2

[ALSO READ: A legal view of corporate taxation in Nigeria]

Please tell me more on the WHT Note

Okay, the WHT credit note is a document issued by a relevant tax authority to a beneficiary as evidence that withholding tax was deducted from its business. It is usually issued to the company that deducted the WHT from your invoice as such you must endeavour to always go back and request for it. This is because without it you will not be able to claim back the money that has been deducted from your invoice.

A WHT Credit note will include the following

  1. Credit Number
  2. The name of the tax payer (purchaser of your services or goods) who deducted the tax and remitted on your behalf
  3. The name of the beneficiary whose invoice was deducted (which is you I suppose)
  4. The Date of the transaction including the nature of the transaction

So what happens if my customer fails to remit my taxes on time?

Too bad, there is nothing much you can do except complain and then blacklist the customer. However, the tax authority upon noticing have penalties ranging from 200% per annum of tax not remitted for companies and N5,000 per annum for individuals. Meaning if your customer fails to remit N100k in withholding taxes already deducted from your invoice his penalty will be to pay N200k extra.

This penalty also applies to anybody who equally fails to deduct as well. Fortunately though, the tax authority can exercise leniency and grant the default some reprieve against the penalty.

remitter withholding tax

Jaiz bank

[ALSO READ: Taxes you need to be aware of if you are about to start a business]

As the Remitter , when Do I have to remit the taxes I deduct?

So, if you deduct taxes from your suppliers invoice you must file returns at the end of any given month. All you do, is draw up a schedule detailing the list of companies you deducted taxes from, their addresses, the value of the invoices,  the tax deducted and the rate, Your name and address as the tax payer and the relevant tax authority . You then attach a cheque(s) for the total amount deducted for the month.

You can pay directly to the bank. Banks these days have agent who collect these cheques on your behalf and promptly obtain receipt of payment on your behalf. After obtaining receipt of payments, you now take to the relevant tax authority attached to your schedule, so you can be handed the WHT credit notes on behalf of your clients. You should keep a file for all the WHT Credit note you receive on behalf of your clients for easy accessibility.

Does it mean all transactions involve WHT?

WHT is mainly for transaction involving contract of purchase. What this means is that WHT can only be deucted from your invoice if it involves supply of goods and services to a destination requested for by your client. WHT cannot be deducted in the ordinary course of your business, meaning if I you sell soaps and I come to your shop or market to buy the soap, I cannot deduct WHT from your receipt.

However, If I ask you to supply to me then that becomes a contract and as such I am obliged to deduct WHT from you.

[ALSO READ: A legal view of corporate taxation in Nigeria]

Please what do you really mean by Relevant Tax Authority?

A relevant tax authority is either the State or the Federal Government. The State Government collected WHT from Individuals or Sole Traders under the Personal Income Tax Act. The Federal Inland Revenue collects tax on behalf of the Federal Government under the Company Income Tax Act

CAVEAT: Don’t forget to always consult a tax consultant for help with your taxes. This only serves as a guide.

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[ALSO READ: Taxes you need to be aware of if you are about to start a business]

Ugo Obi-chukwu "Ugodre" is a chartered accountant with over 16 years experience in financial management, corporate finance and financial analysis. He is also a retail investor and a personal finance advocate with over a decade experience investing in the Nigerian stock market.Ugo is the founder/Publisher of Nairametrics and blogs regularly on the website.

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                      Financial Literacy

                      How to pre-qualify for your banks’ Retail/SME loans

                      The cash flow of borrowers taken in context with the nature of their businesses is crucial in determining their loan eligibility status.

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                      Get a loan in 24hrs, no collateral, no plenty questions

                      The CBN’s directive of July 3rd 2019 compelling Nigerian Banks to maintain a Loan to Deposit Ratio (LDR) of 60%, wherein SMEs, retail, mortgage and consumer lending would be assigned a 150% weight in the computation of this LDR, has definitely been a game-changer in the industry as more commercial Banks focus on retail and SMEs to meet their lending quota in order to avoid stiff CBN sanctions that accompany noncompliance.

                      Indeed, the mass market has become the battleground for Nigeria’s financial institutions with institutional giants previously considered huge corporate giants jostling with Fintechs and MFBs for retail and SME customers, each outdoing themselves with mouthwatering rates and relatively easy to fulfil covenants for loans that are “a click away.” Naturally, this should be good news for the market as getting a loan has reportedly never been easier, but it is not. Most retail customers simply do not qualify for the type of loans they need.

                      READ: Nigerians will soon use their gold as collateral for loans – Minister

                      No matter the pressure from CBN, banks are still profit-making institutions that are duty-bound to protect the interest of their stakeholders, hence their need to comply with best credit practices even when disbursing the smallest of amounts as loans. Their loans are thus, only given to those who meet their requirements, whose records show favourable odds.

                      Here are a few ways of increasing your odds at being pre-approved for your Bank’s retail/SME loan:

                      READ: Interest rates of some loan apps in Nigeria

                      Consolidate your banking activities

                      If you are reading this, then I can safely guess you have an account in a Nigerian bank. If yes, then you probably have accounts with more than one bank; and you probably wear your resources thin trying to service these accounts because “they serve different purposes.” While this may be good for financial planning, it definitely works to your detriment in showing your true cash flow from your turnover.

                      Most retail loan applications require just one bank statement, and in the case where you may be allowed to present statements of more than one bank account for your loan application, a reviewer may suspect duplicity of transactions. Save yourself the hassles and consolidate your banking activities to one account for the purpose of your loan request; to show your capacity.

                      READ: 4 Nigerian banks that offer easy-to-get car loans

                      Ascertain your credit status

                      Do you have any outstanding debts owed to any financial institution? Perhaps you guaranteed a loan with your bank details or one of your abandoned accounts has a negative balance? Clear it before putting in your loan request.

                      Credit is mostly about character. Any financial institution willing to lend you money will make sure that you are in the habit of settling your debts, hence their need for a credit check. There are no forgotten loans in the system; whilst they may have been written off, they are not forgotten. Know your credit status today.

                      Build turnover and average balance

                      Turnover is the total amount that passes through an account within a period while the daily overnight balance on the account summed up and divided by the number of days under review is the average (daily) balance.

                      There is much emphasis on turnover amongst customers who seek loans; however, any credit officer worth his pay usually uses turnover in tandem with your average balance to make decisions on a loan request because the turnover addresses capacity while the average daily balance addresses available capital. Turnover may be easy to manipulate but your average daily balance is not. Build both.

                      READ: FG grants N22.3 billion tax credit to Dangote Cement

                      “Show your workings”

                      As simple as it sounds, this could be the most common reason why some account statements are rejected as fraudulent and the loan requests of their owners denied – because they do not show any underlying transaction or pattern. They are haphazard at best.

                      Jaiz bank

                      It has become commonplace for SME owners to use their company’s account for personal expenses; withdrawing cash with their ATM cards and hardly describing their transactions in details such that a reviewer is unable to decipher who their suppliers or customers are from their bank statement. Not even salary payments appear to be recurring on these statements, as most transactions are in cash.

                      Account statements like this show early signs of impropriety that will have any credit officer doubting the management competence of the loan applicant.

                      Bottomline

                      All of these points, well-observed, may get you pre-approved but no loan is disbursed without a verifiable source of repayment. Collateral will definitely help to assure the lender but the cash flow of the borrower taken in context with the nature of the business is key.

                      While personal loans may be approved based on account analysis, valid Know Your Customer (KYC) documentation and credit checks (depending on the amount); contracting financial experts for proper bookkeeping and development of business plans could go a long way in getting your SME loan request approved.

                      Continue Reading

                      Financial Literacy

                      How to grow rich with the power of profitable relationships (Part 1)

                      You need two currencies to become successful. The first currency is money and the second currency is relationships.

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                      Networking, way to success in Nigeria
                      • There are two currencies you need in the world to grow rich and become more financially successful. The first currency is money and the second currency is relationships. These two currencies must work for you to create wealth and achieve financial success. And among the two currencies relationship is the most powerful and beneficial. This is because you can get to the top without money but with the right relationships. But you cannot get to the top having money alone.

                      Money needs relationships to thrives because all the wealth in the world is created in the context of a relationship. That is, two people must first like, trust and agree with each other to do business or engage in an income-producing activity to create wealth. And while Relationships can produce money, money cannot produce relationships. Thus, you can have all the money in the world and still be far behind in life if you lack important relationships.

                      READ: The five hidden secrets for investing success

                      Charlie “Tremendous” Jones, a one-time legendary speaker and author, puts it this way, “you remain the same person year after year except for the people you meet and the books you read. So, if becoming rich and wealthy is important to you. You must master the art of building profitable relationships and connecting with the right kind of people. Building relationships that produce wealth is thus the fastest way to get to the top. And getting to the top is all about connecting with people that have the advantage that you lack in your own life.

                      How then do you create profitable relationships?

                      To create profitable relationships, you must first recognize that there is an unequal distribution of wealth and advantage in the world. And that for you to be successful, you need to connect with other people. That is, those who have the advantages that you seek. The truth is other people have the answers, deals, money, access, power, and influence that you need to achieve your goals. And they will only give it to you if you are in a relationship with them.

                      READ: Google founders earn $42 billion in 100 days

                      There are two elements that must be present in a relationship to make other people want to invest in your own success. The first is trust. And the second is your ability to solve their problems or offer value. Trust is saying something and doing it consistently over a consecutive period of time. Solving problems for the people you want to attract is also key. This is because people generally care less about your success and more about their own success. So, the only way to get them invested in your success is to first solve a problem that they care about. And the only way for someone to open up about their problems to you is if you are in a close and trusted relationship.

                      What is a Close Relationship?

                      Close relationships are relationships that are bound by mutual interests, mutual respect, and mutual values. Most close relationships are formed within private and sometimes closed environments. A typical example is relationships formed within the confines of a family, a school, an office, a club, an estate, or an event. This kind of relationship is the most trusted relationship and it carries the greatest potential for wealth. Thus, to create wealth two things are important – the quality of your close relationships and your ability to convert strangers into close friends. All relationships must first become close for them to be beneficial for your success. Thus, without trusted close relationships and the ability to create them, it is hard to create wealth or achieve financial success.

                      READ: 5 habits of Nigeria’s business billionaires you should emulate

                      Now you may say to yourself, ‘but I have close relationships, why am I not yet successful?’

                      The answer is simple.

                      While every close relationship has trust in them, not all close relationships can produce income. In fact, no close relationship is designed to automatically create wealth. You have to make them create wealth. Close relationships are like a seed. They are ineffective as seeds but when planted and nurtured can become trees. This means that you must master the art of planting and nurturing your close relationships to become wealth trees.

                      How do you build wealth-creating relationships?

                      Before I show you how to build wealth creating relationships. Let me first show you the two kinds of close relationships that exist.

                      The first is the wealth-consuming relationships. And the second is the wealth creating relationships.

                      Wealth-consuming relationships are relationships that use up capital. They are also known as social relationships. And comprise family relationships, certain friendship relationships, and religious associations. The way the members of this group add value to each other is by offering emotional or spiritual value in exchange for financial support. Wealth-consuming relationships are thus not designed to create wealth and it is hard to make them wealth creating in nature. Nevertheless, they are important relationships. And provide essential spiritual and emotional balance. So, the only way to thrive financially regardless of them is to combine them with the second kind of relationship – the wealth-creating relationship.

                      Wealth-creating relationships are relationships that produce income or enlarge opportunities. They are also known as professional or business relationships. Professional or business relationships comprise relationships with co-workers, peers, and club members. They also include relationships with your neighbors, customers, partners, vendors, advisors, etc. Members of this group are pre-sold on creating wealth. They are open to learning about new information. Discovering new ideas and opportunities. Open to doing business together and meeting new people. The way this group adds value to themselves is by pointing each other in the right direction. They connect each other to people, businesses, opportunities, and organizations that can help them. And they support each other through difficult times. Although most people have these relationships, they are still not wealthy.

                      Jaiz bank

                      The reason for this is simple

                      Professional and business relationships will not automatically create wealth for you. They have to be made to create wealth. These relationships are like seeds. They are ineffective as seeds but when planted and nurtured can become trees. This means that you must not only know how to develop these relationships. You must also know how to turn them into wealth trees. To convert professional or business relationships into wealth-creating relationships you need to do three things.

                      First, you need to become a high-income problem solver. Second, you need to become a value connector. And third, you need to join a wealth-creating problem-solving platform. Let’s look at each of these points in detail

                      1.Become a high-income problem solver

                      A high-income problem solver is anyone that solves problems that produce high income. Solving problems for people is the only way to create wealth and enter into high-quality relationships with other people.  To solve problems, you need experience. And the fastest way to gain experience is through your own personal journey. Personal experience can make you an instant expert in an area that would usually take years of hard labour in school to develop. Being an expert is important to build trust with your close relationships.

                      For example, if you are passionate about weight loss but are struggling with losing your own weight, you have an excellent opportunity to become an expert in that area especially for those who are struggling to lose weight. All you need do is overcome your own struggles and lose weight. And then you can help other struggling people do the same. When you successfully solve your own personal problems, you become the expert that can help others solve the same problem. This makes you more magnetic and interesting to other people. The key here is to create such a rich life that has many inspiring stories, experiences, and achievements. You must reach the point in your life where you have a lot of “How Did You Do This” stories. How did you get enough money to start your first business? How did you rise to become the CEO of a multinational company? How did you overcome cancer? How did you stay married for 50years? How did you achieve Financial freedom etc.? The more “how did you do this” stories you have the easier it will be to connect with people and build rich relationships.

                      However, you must ensure that some of your how did you do it stories can produce high income. And involve solving problems that affect a lot of people. You must also ensure that you begin helping people as soon as you start taking the right steps and not after you have achieved your end goal.  Sometimes being an expert does not mean that you are perfect or have arrived. It simply means that you have taken certain steps that others are struggling to take. And you can guide them. If you are ahead of anyone in a particular area you can become the expert in that area to them. Becoming a high-income problem solver is thus not just important for earning a high income but also important for building rich relationships. When you master the art of solving high-income problems you become a valuable person that other people want to meet.

                      To be continued next week…

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                      About the author

                      Grace Agada is the most sought-after Financial Planning expert in the country and is quoted frequently in leading Newspapers, magazines, and blogs. Grace is a Renowned Keynote Speaker, Author, and Column Contributor in Punch Newspaper, This Day Newspaper, Vanguard newspaper, Business Day Newspaper, Leadership Newspaper, The Tribune Newspaper, and Online Platforms like Nairametrics, Proshare, and Bellanaija. Grace is the Founder of “The University of Wealth” The author of “The Financial Freedom MBA Program”, “The Better Life in Retirement Planning Blueprint” and “The Wealthy Business Blueprint”. Grace is on a mission to shrink the middle class and populate the upper class. She has been featured on BBC Africa. Business Day TV. Inspiration FM. and inside Naijatv. And she consults for Numerous Top Organizations, Company Directors, CEOs, Senior Executives, and High-Income Professionals.

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