How you plan your business affairs can cause you or your employees to pay more taxes than necessary. The ability to understand the tax statues and how you structure your operations plays a key role in tax planning.
Tax planning is a process of looking at various tax options in order to determine when, whether, and how to conduct business and personal transactions so that taxes are eliminated or considerably reduced.
Although tax avoidance planning is legal, tax evasion – the reduction of tax through deceit or concealment - is not.
Meals and refreshments
According to the Income Tax Act CAP 340, meals and refreshment are included in the taxable non cash employment benefits under the law.
Where a benefit provided by the employer to an employee consists of provision of any meal, refreshment, or entertainment, the value of the benefit is the cost to the employer of providing the meal, refreshment or entertainment, reduced by any consideration paid by the employee for the meal, refreshment or entertainment.
For example if the meals are provided for 26 days in a month, each meal costing 5,000 and the employee is not contributing anything, then the benefit is Ugx130,000 per month (5,000 x 26). This amount is added to the employee’s basic pay to arrive at the Gross Taxable pay which is used to compute PAYE.
A good tax planner would however take not that meals and refreshment can be exempted from being a chargeable income if: The value of meals/refreshment provided to all employees at equal terms in premises operated by or on behalf of the employer.
This means that instead of giving your employees lunch allowance (taxable) or preferential meals based of employees position (taxable since its not equal terms), it would be tax efficient to provide group meals where all employees from the top boss to the caretaker have the same meals (not taxable). An option would be to get an outside caterer bringing food for all staff or you have a resident cook do the cooking :)
Staff meals and refreshment are allowable business expense for tax purposes. This means you will save the employee the extra tax burden (PAYE) while reducing the business corporation tax payable.
I have seen many NGOs giving their staff medical allowance. In according to income tax Act, this is part of the composition of employment income and as such is eligible to be included in the gross taxable pay for PAYE computation.
The act however provides the employee a relief, hence exempt income on discharge or reimbursement of the employee’s medical expense.
This means that if you gave an employee a monthly medical allowance of Ugx250,000, it will be added to their basic pay and taxed whether they fell ill or not. However, if the employee is only reimbursed for actual medical expenses incurred to the same tune of Ugx250,000 (there should be documentary evidence of course) this is treated as company/ business/organization expense and therefore not taxed on the employee.
If your budget for an employee’s medical expense per annum is 3,000,000 (250,000 x 12), a good option is to put the employee on a medical insurance scheme and pay a premium equivalent to that. This has the extra advantage of inpatient and outpatient cover that go even up to 30 Million or more a year depending on the package given to the employee and their dependents. This will help the business and employees not to worry about having no money when an employee or their dependents are in need of medical attention. Medical insurance cover will also be treated as company/ business/organization expense and therefore not taxed on the employee. This means you will save the employee the extra tax burden (PAYE) while reducing the business corporation tax payable.
As I said in part 1 of this series, Tax planning is a process of looking at various tax options in order to determine when, whether, and how to conduct business and personal transactions so that taxes are eliminated or considerably reduced.
The company car
There are many benefits that an employee enjoys that maybe taxable depending on how they are transacted. In part one of this series we discussed Meals/ Refreshments and in part two we discussed Medical expenses. Today we look at the company car.
Where a benefit provided by an employer to an employee consist of the use or availability for use, of a motor vehicle wholly or partly for the private purposes of the employee, the value of the benefit is calculated according to the following formula:-
A is the market value of the motor vehicle at the time when it was first provided for the private use of the employee;
B is the number of days in the year of income on which the motor vehicle was used or available for use for private purposes by the employee for all or a part of the day;
C is the number of days in the year of income;
D is any payment made by the employee for the benefit.
Clearly from the above formulae, the more expensive the car, the more taxes you pay. The more days you have the car at your disposal the more taxes you pay.
Here is a food for thought: If you compare the tax you will need to pay on the benefit of a company car vis-a-vis having your own personal car which one is better? A friend told me that when she did the analysis, in the long run it was cheaper for her to buy her own car and maintain it than to pay the benefit in kind of a company car.
Staff Loans and Salary Advances
If an Entrepreneur gets broke they can; sell a product or service, look for an outstanding debtor to pay up. What does a broke employee do? I posed this question sometime back and got interesting answers. Among them were, “get a salary advance” or “get a salary loan”.
Many our companies do just that, they either give staff a salary advance or salary loan depending on the amount in question and the company policy.
I remember a placed I worked and we had no money to pay taxes and other obligations that were due the following week and yet the trade debtors were not that bad to put the company in cash constrain situation. On analyzing the financial statements further we realized that our biggest debtors were the employees! Imagine about 30 employees who have salary advances and loans of an average of Ugx 3,000,000 each. That’s a whooping Ugx90,000,000 of working capital tied up!
I remember informing management of this clause in the Income Tax ACT and you can imagine the drastic changes that were made.
The ACT states that where a benefit provided by an employer to an employee consists of a loan, or loans in total, exceeding one million shillings at a rate of interest rate below the statutory rate, that value of the benefit is the difference between the interest paid during the year of income, if any, and the interest which would have been paid if the loan had been made at the statutory rate for the year of income. Statutory rate refers to the Bank of Uganda discount rate at the commencement of the year of income.
Example: if an employer gives an employee a school fees loan of Ugx400,000; a furniture loan of ugx500,000 and an appliances loan of Ugx300,000 at 10% interest per month when the statutory rate is 15%, the benefit would be Ugx60,000 (i.e. 1,200,000 x 15%) – (1,200,000 x 10%) = 180,000 – 120,000.
Salary advance are deemed payable or recoverable within that payroll month, meaning that a salary advance of more than a million recovered for more than a month is assumed to be a loan given at 0% interest rate. Assume the above example was a salary advance, how much taxable benefit would you have accrued?
The above are just some examples of how to conduct business and personal transactions so that taxes are eliminated or considerably reduced.
Excerpts are from URA Employment Income Vol 2 Issue 2 FY 2014-2015