Relevant Updates In Nigerian Law Concerning SMEs
Ebube Godwin Onyejekwulum Esq. is an Associate at Synergy Attornies and be reached via Ebubeonyejekwulum@yahoo.com or @lekkilawyer on Twitter.
Introduction
The SME sector is the backbone of developed economies and an important contributor to employment, economic and export growth. In Nigeria, SMEs contribute 48% of national GDP, account for 96% of businesses and 84% of employment. According to the Nigeria Bureau of Statistics, small and medium scale enterprises (SMEs) in Nigeria have contributed about 48% of the national GDP in the last five years. With a total number of about 17.4 million, they account for about 50% of industrial jobs and nearly 90% of the manufacturing sector, in terms of number of enterprises.
Despite the significant contribution of SMEs to the Nigerian economy, challenges persist that hinder the growth and development of the sector. The major hindrance to SME growth in Nigeria is access to capital, other challenges encountered by the sector includes lack of skilled manpower, multiplicity of taxes, enormous cost of doing business etc. A recent survey shows that about 96.3 percent of businesses in Nigeria have been hit by the pandemic. Research also shows that over 50% of SMEs fail in their first year of operation and over 95% of SMEs fail in their first five years.
Against this backdrop, every responsible government introduces policies and legislation to encourage the growth of SMEs. Nigeria has a number of provisions particularly in CAMA 2020 and the Finance Act(s) which are intended to ease regulatory burdens on SMEs and thereby fostering their growth in an enabling environment. Also, these legislations contain important updates which a diligent entrepreneur or business manager is expected to be conversant with. The current administration provided opportunity for 250,000 Free business name registration at CAC and 50 Billion Naira Covid-19 Targeted Credit Facility to support SMEs. More needs to be done in these challenging times.
Companies and Allied Matters Act 2020(CAMA)
The Companies and Allied Matters Act (Chapter C20) Laws of the Federation of Nigeria 2004 was initially made law in Nigeria in 1990 as a decree of the military government. For decades of the commencement of the old CAMA, it did not undergo significant amendment, and businesses had to essentially rely on a 30-year old law to govern business operations in a dynamic and evolving global community. However, the situation has changed as the President assented to The Companies and Allied Matters Act (2020) on 7th August, 2020. The new law contains provisions which have direct bearing on SMEs which will be highlighted below.
- Small Companies Redefined: The threshold for defining small companies has been increased, to enable more companies qualify as small companies and therefore enjoy the benefits conferred on small companies by the CAMA 2020.
Under the CAMA 1990, a small company was regarded as a small company if it:
- is a private company limited by shares;
- has no foreign shareholders;
- its directors hold not less than 51% of its shares;
- none of its members is a government, a government agent or nominee;
- has a turnover of not more than N 2 million; and
- has a net asset value of not more than N 1 million.
Under section 394 (3) (b)-(c) CAMA 2020, the above criteria is retained with two significant amendments:
- the annual turnover of a small company should not exceed N120 million; and
- its net asset value should not exceed N 60 million.
What this means is that many companies that previously could not qualify as small companies will qualify under the CAMA 2020, and therefore enjoy the concessions granted to small companies under the Act. The additional benefits that small companies enjoy are that they do not have to hold annual general meetings (Section 237 (1) appoint auditors (Section 402 (1) (b)) or a company secretary (Section 330 (1)).
- Single Shareholder: Under Section 18(2) of CAMA 2020 it is now possible to incorporate a private company with only one shareholder. Such companies will be exempt from the provisions of the Act that relate to quorum for meetings, adjournment of meetings. Under the Old CAMA, sole membership of a company was impossible, and the founders were left with the option of engaging relatives, friends or associates to subscribe to a minimum of one share or to register as a “business name” or “sole proprietorship” which does not offer the legal protections and benefits associated with limited liability companies. With this development, Nigeria has joined England and other jurisdictions where it is possible for entrepreneurs operating as sole proprietors to register a limited liability company for their business and enjoy the benefits of incorporation This new provision gives more flexibility, efficiency and control to founders who wish set up the corporate structure for their business idea by incorporating a limited liability company before introducing partners and investors later. Private companies that do not qualify as small companies are permitted to have a single shareholder, however, such private companies must have at least two directors.
- Single Director: CAMA 2020(Section 271) excludes small companies from the requirement of having a minimum of 2 directors as required under the previous Act. This means that small companies can now be registered with one director. This welcome development will ease the administrative burden and cost of running MSMEs as the entrepreneur who sets up the business can serve as its sole director. As the company grows, however, and when it ceases to be a small company, it will have to appoint additional director(s) because only small companies will be permitted to have just one director.
- Reduced costs for registering security: Prior to the CAMA 2020, the CAC filing fee for registering security interests was 1% of the secured amount (for private companies) and 2% of the secured amount (for public companies). Under the CAMA 2020, the CAC cannot charge more than 0.35% of the secured amount.(Section 222(12)) The implications of this for the cost to Nigerian businesses of obtaining credit cannot be overstated, as Nigeria, prior to the CAMA 2020, had a reputation for the significant regulatory costs associated with creating security for debt financing.
- New corporate structures: Limited Partnership (Part C – sections 746 – 794) and Limited Liability Partnerships (Part D – Sections 795 – 810). With the LLP, promoters can now take advantage of the tax efficiency of the business name, yet enjoy the limited liability protection that could only be enjoyed by a limited company in the old CAMA. Before CAMA 2020, partnerships did not enjoy limited liability status except those registered under the Partnership Law of Lagos State. Under the old CAMA, partners were liable for the liabilities incurred by the partnership. The CAMA 2020 now recognises a registered LLP as an independent and distinct legal entity from the partners. An LLP is a perfect corporate structure for business ventures between individuals or corporate bodies that do not desire to source/attract equity financing. However, where the intention is to raise equity finance, it is best to register a limited liability company.
- Electronic/digital innovations:
- company records/register can be maintained in electronic format- Section 731 (2).
- electronic share transfer forms will be accepted by all companies- Section 175 (1).
- a private company may hold its general meetings electronically/virtually provided that such meetings are conducted in accordance with the articles of the company; CAMA 2020 permits private companies to now hold general meetings virtually. This will go a long way in reducing costs for small businesses. This is expected to facilitate participation from any location at minimal costs.
- in addition to the notice given personally or by post, notice may also be given by electronic mail to any member who has provided the company an electronic mail address- Section 244 (3).
- any document required to be annexed to the annual return may be delivered to the Corporate Affairs Commission (“CAC”) either in hard or soft copy.
- The new CAMA makes provision for electronic filing S.861 of the new CAMA provides that certified true copies of electronically filed documents are admissible in evidence, with equal validity with the original documents.
- CAMA 2020 now provides that documents requiring authentication by a company can be signed electronically by a director, secretary, or other authorized officer of the company, and need not be signed as a deed unless otherwise specifically required by CAMA 2020.
With these introductions, business operations conducted remotely and electronically endorsed documents will be fully recognised by the Corporate Affairs Commission (CAC). These provisions are geared towards easing business processes and eliminating technicalities associated with strict application of the old CAMA.
- Common Seal: Under CAMA 2020, it is no longer mandatory for a company to have a company seal so companies can now choose whether or not to have one. (Section 98).
- Minimum Issued Share Capital: CAMA 2020, replaces the minimum authorized share capital with a requirement for companies to maintain a minimum issued share capital. Private companies are required to have a minimum issued share capital of N100,000, while public companies are required to have a minimum issued share capital of N2,000,000. (Section 27 (2)(a)).
- Introducing Statements of Compliance: This can be made by the business promoter/owner. This has eliminated the “mandatory” requirement of statutory declaration of compliance by a legal practitioner in the company incorporation process. S.40 (1). However, it is still advised that SMEs engage the professional services of lawyers to ensure that all requirements of the law are met thereby avoiding unnecessary delays and errors.
The Finance Act(s)
Currently, Nigeria adopted the system of passing finance bills together with appropriation bills. Over the last two years, the Finance Act (the “FA”) 2019 and Finance Act 2020 amended various tax laws in Nigeria. The new privileges under the CAMA are in addition to the tax incentives contained in the Finance Act(s). Some of the incentives are highlighted below as follows:
1. New Basis for Charging Companies Income Tax (CIT)
Startups and SMES may pay 0% CIT due to the new basis of computing CIT. Though, this depends on their annual turnover. The Act exempts small companies (defined as companies with turnovers of less than ₦25,000,000) from paying minimum tax and dividends received from small companies in the manufacturing sector in their first five years of operation are exempted from tax. In addition, medium sized companies (with turnovers between ₦25,000,000 – ₦100,000,000) are now required to pay a lesser rate of 20% as CIT; however, the former CIT rate of 30% is still applicable to large companies (with turnovers above ₦100,000,000). It is important to note that every company including small companies exempted from tax are required to keep and maintain books of accounts.
2. Tax Holiday for Small Companies Engaged in Primary Agricultural Production
Section 1 (7) of the Industrial Development (Income Tax Relief) Act now grants an initial tax-free period of 4 years to small companies engaged in primary agricultural production which can be extended by a maximum of 2 years subject to the satisfactory performance of any company granted the incentive. Small companies that are granted this incentive would however not be qualified for similar incentives provided in any other legislation in Nigeria. This is a welcomed development as this will go a long way in attracting investments to the agricultural industry.
3. Tax Returns by Small and Medium Scale Companies
In line with the ease of doing business and in accordance with CAMA 2020, small companies were exempt from the requirement to appoint auditors. Effectively, small companies are no longer required to prepare audited financial statements which is a requirement for filing annual corporate tax returns with the Federal Inland Revenue Service (FIRS). Consequently, the FA 2020 introduced an amendment to Section 55 of CITA by introducing a new sub-section 7 which empowers the FIRS to issue a notice specifying the forms of accounts to be included in the tax returns of small companies. This implies that the cost of engaging the services of an auditor has been eliminated for SMEs.
4. Penalties and interests for Deliberate and Dishonest Returns
In addition, a new Section 53 of CITA now imposes additional tax liabilities to discourage deliberate misstatement of profit and taxes. Specifically, any additional outstanding tax liabilities arising due to deliberate and dishonest declaration of the profits or tax payable by companies will now attract penalties and interests as prescribed by CITA. By extension, any additional tax liabilities established by the FIRS during desk audits, field audits and investigation exercises will now attract penalties and interests. The penalty and interest will accrue from the date the incorrect returns were filed. Therefore, based on these provisions in the amended sections 53 & 55 of CITA, SMEs are to ensure that the forms of account to be submitted contain honest and accurate information to avoid penalties and interest.
5. Introduction of a requirement for banks to demand for tax identification number (TIN)
The Finance Act 2019 amends the Companies income tax act such that Banks would be required to obtain TIN from corporate customers as a pre-condition for opening or maintaining bank accounts. There is also a similar provision in the Personal Income Tax Act. This is already the practice but the legislation gave it force of law (See section 28 of Finance Act 2019 which amended section 49 of PITA).
6. Capital expenditure on software or electronic applications now qualify for capital allowance
See 2nd schedule to the CITA as amended by the Finance Act 2020.
7. Amendments To The Value Added Tax Act (Vat)
The Finance Act 2019 amends section 4 of the VAT Act and increased in the VAT rate from 5% to 7.5%. However, the FA 2019 also amends section 15 of the VAT Act by an Introduction of ₦25 million taxable supplies threshold for taxable persons required to register for VAT and file returns (Section 8 of VATA was amended and there is higher penalty for late filing ₦50,000 for first month and ₦25,000 for subsequent months). Consequently, any taxable person who does not fall within the threshold above would be exempted from registering, remitting, issuing tax invoice and collecting VAT. The threshold of ₦25 million within the calendar year will certainly reduce the tax compliance burden for small companies.
There is also an expansion of VAT exemption list to include: basic food items (agro and aqua based staple foods) such as additives, cereals, cooking oils, culinary herbs, fish of all kinds (other than ornamented), flour and starch, fruits, live or raw meat and poultry, milk, nuts, pulses, roots, salt, vegetables and water, locally manufactured sanitary towels, tuition (primary, secondary and tertiary education), and services rendered by Microfinance Banks and Tuition in Nursery, Primary, secondary and tertiary education. Animal feed and hire/sale of agricultural equipment were added to the exempt list by the Finance Act 2020.
8. Small companies are exempted from payment of 2% TETfund tax.
Conclusion
Despite the challenges faced by SMEs in Nigeria, it is hoped that with the knowledge of the relevant updates in the laws, most SMEs will take full advantage of same in their business operations. Consulting a professional lawyer for legal advice is crucial for the success of any company or business.
