When forming and operating a business, startup owners obviously will be prone to some critical tax issues. This is because most startup owners have either some basic knowledge or no knowledge at all when it comes to the issue of tax. By paying attention to these issues, startups can position themselves well to take advantage of some meaningful tax benefits and avoid tax problems.
It is also notable that although it might seem expensive at the beginning of a business to engage the services of professionals such as Chartered Accountants, Lawyers and Tax professionals, however, it is the best decision to consider so the business doesn’t suffer in the future as a result of lacking knowledge in the area of taxation.
Young business owners can also make it a point to visit offices of the various revenue agencies to acquaint themselves with some knowledge in taxation; i.e., when they find it difficult to procure the services of tax professionals.
Nonetheless, the question that arises is: how well must we plan with respect to taxation for Startups?
While it is perfectly fine to have better understanding of taxation as a Startup owner, utilising proper methods for tax planning would be a better move in the long run. One good way is to have some appreciable level of insight in relation to taxation for future planning.
It is extremely important to understand your tax obligations when starting a small business, including effective record-keeping. A new business owner should be prepared and understand the kinds of taxes relating to the business. The following are the tax categories which operate in Ghana under our tax legislations:
Direct and Indirect Taxes:
- Direct Taxes
Direct taxes affect income of the recipient visibly. The income is reduced by the imposition of tax, and the difference between the gross and the net is clear and obvious.
The burden falls on the income earner
- Income Tax:
Income tax is imposed on all sources of income as stated in section 7, 8 and 9 of the Internal Revenue Act, 2000 Act 529.
Examples of such incomes are from:
- Business, which includes trade, profession and vocation
- Investment from sources such as interest, rents and royalties.
- Capital Grains
This is levied on the realisation of chargeable assets such as land and buildings, where gains from the realisation exceed GH¢50.00
- Gift Tax
This is levied on specific gifts, either in cash or in kind, with a value exceeding
- Indirect Taxes
Indirect Taxes on the other hand are not so visible. They are taxes on goods and services, and are normally passed on to customers of the product or service. The seller or service provider might not bear the tax. The tax is sometimes treated as part of his operational expenses and is added to cost of the product or service.
Examples of indirect taxes are:
- Customs Duty
- Excise Duty
- Value Added Tax
All the stated taxes are used primarily as a source of revenue for governments all over the world. The revenue is used to help governments in administration of areas under their jurisdiction. It is used also to provide social infrastructures such as roads, hospitals, schools and public services.
It is also important to get things right, and the following are points to consider to avoid tax problems that many start-up companies experience:
- Form a proper structure from the beginning; your form of business determines which income tax returns you will have to file:
- Sole Proprietorship: A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organisation to start and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal liabilities. You undertake risks of the business for all assets owned, whether or not used in the business. You include the income and expenses of the business on your personal tax returns.
- Partnership: A partnership business is a relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labour or skill, and expects to share in the profit and losses of the business. A partnership must file annual returns and accounts to report the income, deductions, gains, losses etc. on its operations, but it does not pay income tax. Instead, it passes any profits or losses through to its partners.
Each partner includes his or her share of the partnership’s items on his or her tax return. Partnership income for a basis period of a resident or non-resident partnership is accessible income under section 6 of Act 592 (the accessible income) in which chargeable income is based. This means that all remitted foreign income will be included in the income of the partnership, irrespective of the residence of the partnership.
- Limited Liability Companies: A limited Liability Company is an entity formed under the state law (the Companies Act). It must be understood that none of the members of a Limited Liability Company are personally liable for its debts, which means that a company is liable for tax on its chargeable income in accordance with sections 5 and 6 of Act 592.
A dividend paid to a resident company by another resident company is exempt from tax, when the company receiving the dividend controls directly or indirectly 25% or more of the voting power in the company paying the dividend.
The above exemption does not apply to dividend paid to a company by virtue of its ownership of redeemable shares in the paying company (subscription for redeemable shares may be structured in such a way that they are a substitute for a loan).
What to do when starting business
- Inform the Ghana Revenue Authority
- Have clear and accurate records of
- Day to day expenses
- All capital expenditure
- Staff wages
- Submit accounts and other tax returns at the end of the basic period
One of the key factors in the start-up business is the culture of good record-keeping, especially records that will come in handy when it is time to think about taxes on the business. Good records can help your business in a variety of ways, from monitoring your business financial growth to the preparations of your business financial report and tax returns
Suggestions to help you keep better records for tax purposes include the following:
- Monitor the progress of your business
You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Being on top of this information by keeping good records can increase the likelihood of your business success.
- Prepare your financial statements
Good records are a must in order to prepare detailed and accurate financial statements. This statement can help you not only in filing your tax returns but also help to manage your business in any efficient manner.
- Identify the source of receipts
You will receive money and/or property from many sources during the course of business, and your records can identify the source of those receipts.
This information is valuable due to a couple of reasons.
Firstly, it will separate your business receipts from your non-business receipts. Secondly, it will separate your taxable income from your non-taxable income. This business record can also be helpful in the event that your business is audited by the tax authorities
- Keep track of deductible expenses
Valid business expenses are deductible, and the best way to lower the amount of taxes your business will be obliged to pay is to keep good records. Generally, an expense is deductible if it is ‘ordinary and necessary’ in running your business. It is a good idea to keep track of business expenses by recording them as they occur, otherwise you may forget them when the preparation of your tax returns are due.
Support items reported on tax returns
There is always a chance that your business may be audited, so it’s a must that you keep business records and make them available at all times for inspection by either the Ghana Revenue Authority or your own reporting Accountants.
In the event that your records or tax returns are examined by the Ghana Revenue Authority, you may be asked to explain the items reported; so a complete set of records will speed up the examination. Please note that if your business is audited, the auditor is allowed to access and review your personal financial records as well.
Maintaining a record of the source of receipts can help ensure that proper deductions are claimed, and deductions questioned by a tax authority have the appropriate support. Comprehensive records assist with the preparation of accounts and other tax returns, and provide a strong defence against any suspicion of wrong-doing.
Note: it’s always advisable to engage a tax professional or an experienced accountant to assist you in these areas.
An experienced accountant can help you reduce your tax exposure once the best record-keeping is practiced.
Others factors worth consideration
There are many factors for new startup companies to consider. Between planning how to handle management, hiring, buying, marketing, restructuring and all of the other facets of a ‘new startup’, the issue of taxes can often be placed on the backburner.
The key is to set aside time to study what common tax issues plague businesses similar to yours, to avoid making the same kinds of mistakes.
This can go a long way in preventing any taxation-based unpleasantness later on. Below are other ways to avoid tax problems that many startup companies experience.
- Form a proper structure from the beginning
- Separate personal and business expenses
- Do not forget about payroll taxes if you want to avoid steep penalties
- Hire experienced tax professionals
- Hire third-party players with proper agreements.
To make things easier for startups, government must ensure that the Registrar-General’s Department collaborates with other quasi-government agencies such as the Revenue Agencies to have a one-stop-shop where the Tax Agencies will not only focus on issuing TIN Numbers to newly registered businesses, but also provide some basic tax information right from the word go. Examples may include why the need to comply with payment of taxes, and all the benefits that are associated with tax payments.
Again, government can consider giving some special dispensations to startups by granting tax holidays within, at least, the first year of their business to enable them get the right footing before eventually being taxed. Startups should be educated on concepts of tax compliance, as it’s beneficial to them and sets them free from getting into legal issues which may impede the growth of their business.
>>>Felix Ekow Eshun is a Banker and Supply Chain Professional. He is also a member of the Young African Leaders Initiative (YALI) and an entrepreneur. Email: [email protected]
Richmond Dadzie has worked extensively in Accounting firms and Banking Institutions. He has successfully dealt with cases in tax and audit issues for Companies and Institutions. He is a chartered Tax Accountant and a Certified Forensic Auditor. You can contact him on [email protected].