Businesses always desire to cut costs and make more profits. Now more than ever, because of coronavirus, it is important for businesses to save as much money as possible.
This can be through reducing your tax burden. You pay less taxes as a business if you keep proper records.
Taxable income of a business is determined by the difference between the business’ gross income and allowable deductions.
Gross income is made up of employment income, property income and business income.
The more allowable deductions a business has, the less tax they pay.
According to Certified Public Accountant (CPA) and Tax Manager PricewaterhouseCoopers (PwC), Veronica Magembe, there are specific rules that determine tax deductibility.
“We have the general rule of whether expenses are incurred in generating business income, such expenses should be allowable, however, there are specific rules that disallow specific expenses for tax purposes,” she says.
Some of the specific deductible expenses, which come with disclaimers include capital deductions such as capital allowances and repairs of property occupied or used by a person in the production of income.
Interest expenses and carry forward of losses are also considered.
For a business to claim some of the expenses as deductible, it needs proper documentation, for instance in the situation of bad debts.
“The key is to have proper documentation to support the various write-offs. We have seen Uganda Revenue Authority (URA) ask companies for supporting documentation to show what the business has done that indicates that it has done everything possible but has failed to collect,” she says.
Some of the documentation that maybe required, include letters showing that you followed up with the debtors and evidence of board approval for the write-off.
Evidence of legal action or procedure taken in efforts to recover the money is also important.
If the debtor was a company that liquidated, it is important to get proof such that the bad debt is written-off as an allowable deduction for tax purposes.
Businesses with perishable items or expired products can also benefit from a tax deductible.
“Options are either to destroy or sale the goods. For you to get a deduction for such costs, before you destruct the goods, because you write off those assets in your books, notify URA that you have these assets and you are destroying them,” she says.
Depending on the type of goods, she says, you might need other authorities present.
Government has this financial year introduced new presumptive tax rates. Presumptive tax is paid by small businesses with an annual gross turnover below Shs150m.
The new rates prescribe higher taxes for taxpayers without records compared to those with records.
Mr Obed Tindyebwa Bampe, a lecturer, Grand & Noble Business School Ltd, says the previous presumptive tax rates were determined on gross turnover, location and nature of the business.
“The proposed one is now looking at whether the taxpayer has records or not, and also the turnover of the taxpayer,” he says.
For instance, where gross turnover exceeds Shs10m but does not exceed Shs30m per annum, a tax payer without records will pay Shs80,000.
One with records, however, will pay 0.4 per cent of annual turnover in excess of Shs10m.
This means if the business with records registers an annual gross turnover of Shs15m, it would be required to pay 0.4 per cent of Shs5m, which is Shs20,000.
“It emphasizes that as taxpayers, we need to have our records to benefit from such,” Mr Tindyebwa advises.
Electronic fiscal receipting and invoicing system
URA is tasked with collecting Shs21.8trillion in taxes this financial year 2020/21. To plug any leakages through receipt or invoice fraud, URA is onboarding reforms such as the Electronic Fiscal Receipting and Invoicing System.
The system will ensure URA receives real time notifications of business sales represented by receipts and invoices through the e-invoice system.
This can be implemented through linking a business’ already existing system with the taxman’s or using the manual system through the URA portal.
According to Mr Magembe, all businesses are required to register for e-invoicing.
URA gave companies a three month window to adjust to the new system as awareness campaigns are undertaken.
The move, just like the digital tax stamps has already met resistance from the business environment.
To ensure businesses adhere to the reform, URA has made it that any sale that is not registered through the e-invoicing system will not be allowed as a tax deductible.
“Where you purchase a good or a service from a supplier who is designated to be on the e-invoicing system and you do not have the e-invoice, then such expenses will not be allowed as deductible for tax purposes,” Mr Magembe adds.
A business will also be required to have an e-invoice from a supplier in order to claim input Value Added Tax (VAT) from URA.
In addition, URA has made it a requirement for businesses to have registered for e-invoicing in order to be eligible for withholding tax exemption.
Uganda comes after Kenya and Tanzania which had already implemented the EFRIS.
The accounting system should help you record payments to employees and government entities such as the tax and social security authorities.
Other important records you need to maintain are money from or to shareholders, fixed assets and trading stock.
The accounting software is supported by documents such as cheques, receipts, invoices and contracts. Some of the documents are produced by the business while others are got from outside the business.
What you should record
The basic accounting software should enable you to record the name, address and contact person for every customer you deal with. If the customer is local, that is Ugandan, recording their Tax Identification Number is important.
The invoices issued, and payments or deposits received from the customer are important details. It is good to match every payment to specific invoices so that you can later tell which invoice(s) still has outstanding balance.
Cash information. Your accounting system should help you tell how much money you have at hand or in the bank. The cash record in the accounting system should help you to reconcile with your bank statement.