Tax considerations for business start-ups

It is the ambition of many people to run their own business, and there many reasons why people decide to start their own business. Some may have been made redundant and find themselves with free time and financial resources. Others make the decision to start businesses to be more independent and obtain the full financial reward for their efforts. Whatever the reason, there are a number of factors which one needs to consider before starting a business.

It is the ambition of many people to run their own business, and there many reasons why people decide to start their own business. Some may have been made redundant and find themselves with free time and financial resources.

Others make the decision to start businesses to be more independent and obtain the full financial reward for their efforts. Whatever the reason, there are a number of factors which one needs to consider before starting a business.

One of these reasons is taxation.
First and foremost, a number of taxation aspects must be well thought-out. The three most important ones are taxation on profits, Value Added Tax (VAT) and Pay As You Earn (PAYE).

Taxation on profits

The type and rate of taxation for your new business will depend on the form of your business structure. However, the taxable profit will normally differ from the profit shown in the accounts due to certain expenses which are not allowed for tax purposes and the timing of some tax allowances.

Value added tax (VAT)

Accounting for VAT correctly is an essential part of any business and neglect may result in a significant loss to the business as well as penalties from the taxman. When starting a business, you should consider the need to register for VAT. If the value of your taxable sales or services exceeds the registration limit, which currently is Rwf20 million per annum, you will be obliged to register, whether you like it or not.

Employing others

For the business to get off the ground or to enable expansion, it may be necessary to employ staff. It is the employer’s responsibility to deduct income tax in form of PAYE and social security contributions, and to account for these to the relevant statutory bodies such as the Rwanda Revenue Authority and the Social Security Fund of Rwanda. Payroll records should be carefully maintained. You will also need to be familiar with the employment law.

You will also need to give some thought on how to structure your business, as this will have an impact on the manner in which you will be taxed. There are two common types of business structures, namely Sole Proprietorship and a Limited Company.

A sole trader is the simplest form of business since it can be established without legal formality. However, the business of a sole trader is not distinguished from the proprietor’s personal affairs.

In a company, the business affairs are separate from the personal affairs of the owners, but there are legal regulations to comply with. The appropriate structure one decides upon will depend on a number of factors, including consideration of taxation implications, the legal entity, ownership and liability.

Whilst some generalisation can be made about starting up a business, it is always necessary to tailor the strategy to fit your situation. Any plan must take account of your circumstances and aspirations. Whilst business success can never be guaranteed, professional advice can help to avoid some of the problems which befall new businesses.

It is always advisable to seek assistance from competent professionals in formulating a strategy suitable for your own requirements.

The author is a Tax Manager with PwC Rwanda
frobisher.mugambwa@rw.pwc.com

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