LEGAL MATTERS IN BUSINESS; IMPLICATIONS OF THE COMPANIES AND ALLIED MATTERS ACT 2020, THE FINANCE ACT OF 2019 AND THE FINANCE ACT OF 2020 ON SMALL AND MEDIUM SCALE ENTERPRISES

 

Nigeria is the Country with the largest GDP in Africa and SMEs make up for 95% of the business in the Country. Needless to say, SMEs play a very important role the growth and development of the economy of Nigeria. The Government has made some laudable attempts to promote the ease of doing business in Nigeria. In the past three years three laws have been passed to improve business operations in Nigeria. These are the Companies and Allied Matters Act, 2020, the Finance Act of 2019 and the Finance Act of 2020. We shall review the implications of the these laws on SMEs in Nigeria.

 THE COMPANIES AND ALLIED MATTERS ACT 2020

 The Companies and Allied Matters Act 2020 repealed the Companies and Allied Matters Act of 1990 and it was passed into law by an assent of the President on the 7^th of August, 2020.  This aim of this act was to ease and improve the operations of businesses in Nigeria. The Act introduced new modalities like the decrease in the incorporation fees for registering companies and we shall consider these viz their implications on SMES:

 Single Member Companies: By virtue of new CAMA, it is possible for one person to form and incorporate a private company[1]. Prior to the CAMA 2020, it was impossible for a sole person to form a company as what was required was a minimum of two members or shareholders. However, the ability of one person to form a sole company is limited to private liability companies, public companies still require a minimum of two shareholders.

 This new provision enabling sole membership of a company gives more flexibility and control to founders who may wish to immediately set up the corporate structure for their ideas by incorporating a limited liability company before introducing partners and investors.  In addition, small companies are now allowed to have only one Director as opposed to the old CAMA where all companies where mandated to have at least one Director.

This is a welcome development for SMEs that has resolved business registration bottlenecks. A lot of SMES have been forced into unnecessary partnerships because to legally own a business prior to the new CAMA, one needed to provide two or more persons as founding shareholders and Directors of the business. This eliminates the need to source for another member at the point of registration who is only a member in name and not in deed.

Partnerships: Section 746 of CAMA 2020 also introduced two new registrable business entities which are Limited Partnerships and Limited Liability Partnership[2]. Under the old law, Partnerships could not be registered and they had to go under the umbrella of business names wherein partners were liable for the liabilities incurred by the partnership. However, the CAMA 2020 now recognizes a registered a Limited Liability Partnership as an independent and distinct legal entity from the partners.

This implies that small businesses are not stuck with the option of setting up of a company, but can also enjoy the benefits of partnership if they so wish.

Threshold of Small Companies: CAMA 2020 introduced a substantial increase to the annual turnover of a small company. Under the old CAMA, the yearly turnover allocated to a small company is N 2,000,000.00 (Two Million Naira) and a net asset value not exceeding N 1,000,000.00 (One Million Naira). Anything exceeding this was regarded as a public company.

Under the new CAMA however, the threshold of a small has been increased to N 120,000,000.00 (One Hundred and Twenty Million Niara) with a net asset value not exceeding N60,000,000.00 (Sixty Million Naira), it has no foreigners as its member and where the Company has a shareholding, the Directors own at least 51% of the shares[3]. The implication of this increase is that more businesses may now take advantage of the regulatory and financial privileges enjoyed by small companies.

Minimum Issued Share Capital: CAMA 2020, replaces the minimum authorised 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 N 100,000.00 (One Hundred Thousand Naira), while public companies are required to have a minimum issued share capital of N 2,000,000.00 (Two Million Naira)

Mandatory Appointment of Company Secretaries and Auditors: This Act also exempts small companies from the mandatory appointment of company secretaries and auditors respectively[4].  The exemption of appointment of auditors does not extend to insurance companies, banks and any other company as may be prescribed by the CAC.

The Act also provides for a separate register of secretaries as opposed to the provisions of the repealed Act which merged the Register of secretaries and directors. The main goal of this amendment is to boost the ease of doing business in the Country.

Virtual Meeting: CAMA permits a small company to hold its general meetings electronically, provided that such meetings are conducted in accordance with the articles of the company[5].

This section addresses the problems of distance and cost of holding physical meetings, and also in tandem with global technological realities in our world today.

Elimination of Common Seal: eliminates the mandatory requirement for a company to own a common seal. The Act makes it optional for a company to own a common seal. By this, companies can now authenticate their documents by other means other than a common seal, including the authorized signature of the company.

Electronic filing and Electronic Signature: provides that any document required to be filed with the Commission for registration may be filed electronically[6]. CTC of electronically filed documents are admissible in evidence with equal validity with the original documents. The CAMA 2020 also 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. The Act also allows the use of electronic registers for the registration of transfers of shares in a company. This is also a laudable development that gears towards digital development and innovation.

FINANCE ACT OF 2019

The Finance Act of 2019 (“FA 2019”) was passed into law on the 20^th of January, 2020 by President Muhammadu Buhari. The FA 2019 made substantial amendments to the Companies Income Tax Act, Personal Income Tax Act, Value Added Tax Act etc. The objective of this act was to promote fiscal equity, support SMEs by promoting a business friendly environment and generally improve the ease of doing business in Nigeria. We shall review how the amendments enunciated by the FA 2019 affect SMEs

 Tax Exemption for SMEs: Section 23 of the Companies Income Tax Act (CITA) defines small companies as companies with annual gross turnover of N 25, 000,000.00 (Twenty Five Million Naira) while medium companies are companies with an annual gross turnover of over 25, 000, 000 million Naira but less than N 100,000,000.00 (One Hundred Million Naira). By virtue of the FA 2019, small companies are exempted from Companies Income Tax while Medium Companies are to be taxed at reduced rate of 20% of their profit compared to the previous applicable rate of 30%. SMEs falling within this threshold are therefore relived of the burden of remitting Companies Income Tax and this will increase their returns and expand their growth.

 Value Added Tax: Value Added Tax (VAT) is a type of tax  that is on the sale of goods and services to consumers. The corporate entity or individual rendering goods or services is expected charge VAT on all transactions and remit same to the Government. By an amendment to the VAT Act, the FA increased VAT chargeable from 5% to 7.5%[7]. However small companies are excluded from registering, and remitting, issuing tax invoice and collecting VAT[8]. Thus VAT is only applicable to medium companies and large companies. The regulatory bureaucracy and bottleneck faced by SMEs who fall within the threshold of small companies in registering for VAT has been eliminated. It is important to note that the exclusion of SMEs from VAT does not stop the ripple effects from affecting them. The increase in VAT leads to an invariable hike in the price of basic goods and service.

 Tax Identification Number: The FA 2019, mandates banks to request for Tax Identification Number (TIN) as a precondition to opening and continuous operation a business account[9]. The Act also requires each company to display its TIN on all documents including business correspondences and correspondences with tax authorities, ministries and Government. SMEs are therefore mandated to obtain their TIN to operate. The intention of this provision is to broaden the population of businesses in the tax arena and ease of tax compliance and remittance.

  

THE FINANCE ACT OF 2020

 The Finance Act of 2020 was passed into law soon after the Finance Act of 2019. This aim of this Act is to cushion the effect of COVID-19 on the economy, to also improve the ease of doing business and encourage tax and fiscal responsibility in Nigeria. It is also important to note that this act did not repeal the Finance Act of 2019 and the two acts will subsist side by side, that is the FA 2020 amended some provisions of the FA 2019 without replacing or repealing it. Some implications of the innovations in the FA 2020 on SMEs are:

 Tax Returns for SMEs: The FA 2020 amended Section 55 of the CITA by introducing subsection 7  which empowers the Federal Inland Revenue Service (FIRS) to issue a notice specifying the forms of account to be included in the tax returns of small companies. This is in line with the CAMA 2020 removing the mandatory provisions of small companies to have an auditor and preparing audited accounts. Effectively, small companies are no longer required to prepare audited financial statement which is a requirement for filing annual corporate returns with the FIRS. This implies that the cost of engaging the service of an auditor has been eliminated for SMEs.

 Tax Holiday for Small Companies engaged in Primary Agricultural Production; Small companies involved in primary agricultural production are granted an initial tax free period of 4 years which may be extended for a maximum period of 2 years subject to satisfactory performance of any company granted the incentive[10]. Primary agricultural production here means primary crop production, Primary livestock production, primary fishing production and primary forestry production but excludes intermediate or final processing of produce or any associated, manufacture or derivative of agricultural products. This is a laudable development and it will boost investment in the agricultural industry.

 Obligation to maintain books of account: Every Company including a small company excluded from paying tax is mandated to maintain books or record of account containing sufficient information or data of all transactions. The said book or record is to be kept for a minimum period of 6 years after the year of assessment to which the income relates.

 Exemption of Minimum Wage from PAYE: Section 37 of the Personal Income Tax has been amended to exempt individuals earning minimum wage or below from an employment from the Pay As You Earn (PAYE) that is Personal Income Tax. This by extension will relive the burden of PAYE Tax compliance of their employers which are largely SMEs and improve their ease of doing business.

 Exemption from Tertiary Education Tax: The FA 2020 also introduced a subsection 1 of the Tertiary Education Trust Fund (Establishment, ETC) Act which exempts small companies as defined in the CITA from the payment of Tertiary Education Tax. Nevertheless, medium companies as defined in CITA are still required to pay TET at 2% assessable profit. This tax exemption  will also aid the ease of doing business for SMEs falling within the threshold of small companies.

 Reduction in Excise Duty: As an amendment to the Custom and Excise Tariff, etc (Consolidation) Act, The FA 2020 reduced duties on tractors from 35% to 5%, motor vehicles for the transportation of goods from 35% to 10%, motor vehicles for the transportation of persons from 30% to 5%, motor vehicles for the transportation of more than ten persons from 35% to 10%.

 

CONCLUSION

The amended laws are geared towards providing significant support for SMEs and a further enabling business environment in Nigeria and in general advancing the ease of carrying on business within the Country.

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[1] section 18(2) CAMA, 2020,

[2] Section 746 CAMA 2020

[3]Section 394(3) CAMA 2020

[4] Sections 330 and 402 CAMA

[5] Section 240(2)

[6] Section 860(1) CAMA

[7] Section 4 of the Value Added Tax Act

[8] Section 15 of the Value Added Tax Act

[9] Section 49 of the Personal Income Tax Act

[10] Section 1 (7) of the Industrial Development (Income Tax Relief) Act