As a startup, I can almost bet my bottom dollar that more than 70% of our startups in Nigeria do not set out thinking that they have to pay Income Tax, Value Added Tax, VAT, Witholding Tax (WHT) and Education Tax! While I have no statistics to back that statement, you simply need to just go to a networking event hosting startup and randomly sample from CEO’s, founders and co-Founders of these startup firms to find out how many of them you sampled has a filed their annual returns. My random sampling revealed that an average of 80% of startups that are between 2 - 5 years old are yet to file a single annual return.
Now while my co-founder and I at some point were fighting over my insistence from Day 1, right after incorporation, that we had a TIN (Tax Identification Number), I fought for the 2 years of our existence to make sure we had a tracking of our costs. 2 years later, I am glad I did not relent so that we had some form of book keeping. We were not able to employ an accountant and this is typically the case of most startups. They are focused on the solution they are trying to bring, their value proposition, road to market, monetizing the product, pitching to investors, scaling up, etc., but, one of the most important aspects of any business, i.e. the financials and obligations to the authorities vis-a-viz tax obligations of the business, is almost often relegated to the background. This can become very costly, as we learnt very recently.
Immediately after taking over as CEO, I immediately set out to get our books in order. I am a firm believer of “what you cannot measure, you cannot manage”. So I recruited an accountant and demanded some level of structured reporting on our financials. 8 months down the road when I was comfortable we have gathered the information of our activities the last 3 years, I invited an external auditor to audit our financials to ensure we are able to file our annual returns. We paid our tax liabilities for the 3 years under review and then put in place the process to report our performance on a monthly basis which made it easier for us to prepare our annual financials and audited statements within 2 months from subsequent year ends. But it is also easy to just walk up to the tax office and declare zero returns and obtain a Tax clearance certificate under your belt for a token. We didn’t want to just do that. Our credibility as an organisation and our core value of INTEGRITY will not allow us do that.
We thought we were doing just ok making these filings with the CAC and paying the requisite taxes until 2 months ago, we got a letter from the FIRS slapping us with fines for late submission of our WHT and VAT. This blog is inspired by the fact that I was compelled to write a 3-paged response to the FIRS after a visit to their office 2 weeks earlier to plead our case. Our fine was almost 10 times our annual profit put together for the past 4 years of our audited financials and this is excluding the cost of late submission of our VAT returns for the 3 years we tried to comply with having our annual returns and taxes paid. I gleaned through every aspect of the FIRS website to find any straw to hold on to in our defense as an SME, start-up, bla bla bla that was just trying to do things right and could have “hidden” from the law but we didn’t. I mean, here we are just struggling to breakeven after years of investing in our solution, barely able to pay ourselves as founders any salaries, and the minute we go to the authorities, we are slapped with fines that will put us out of business literarily!
This begs the question, what did we do wrong? Now while it will be quite easy for us to expect that we get some form of respite/reprieve from the FIRS fines and we hope we do, make no mistake, ignorance of the law is no excuse! You need to know what your tax obligations are from day 1 and start working towards making sure that your startup is tax compliant. On the flip-side, it will not be out of place to have an advocacy group from the startup ecosystem to engage the tax authorities on a special category for FinTechs and other startups who are clearly creating employment, improving efficiencies in the economy but are yet to be able to support the overheads of a fully functioning financial services department. There are also some startups that offer financial services a la carte. These are firms outside your own startup that you can outsource your accounting services to for a small fee. I do not want to delve into financial reporting apps that you can also sample and use to start your book keeping from day 1. Just remember, being a startup does not shield you from your tax obligations. If you are a founder, co-founder, CEO of a startup, be sure you have this angle figured out from the get go and if you haven’t yet, learn from our case.
As a lesson for some of you in the ecosystem, you are to file your VAT and WHT returns on the 21st day of every month and this has to be done Monthly! For us, the cost of just complying far outweighs what we would even be submitting as VAT or WHT just because of the nature of what we do. So it is imperative that discussion be held with the authorities to find a way to deal with the peculiarities of Startups & SME’s vis-a-viz complying with these laws. In the meantime, where does your start-up stand in complying with tax obligations? I will like to learn from your experience.
If you want to know more, just go to www.firs.gov.ng or visit the local tax office near you. Hey! they got free calendars and forms that will clearly teach you how to go about complying.