If you run or plan to start a small business in Nigeria, taxes are one of the things that can quietly choke your operations—without warning. Not because tax itself is bad. In fact, taxes are a civic responsibility. But because many business owners do not understand the system they are entering, and the system itself doesn’t forgive ignorance.
Let’s be honest—most Nigerian entrepreneurs jump into business with energy, vision, and product knowledge. But they forget that running a successful business requires more than selling or delivering value. You must manage compliance. Otherwise, you will wake up one morning to an account freeze, a tax audit notice, or a fine so huge it wipes off your profits. This is not theory. It is happening every day.
1. Ignorance of Tax Registration Is No Excuse
Many small business owners don’t even know they are required to register with the Federal Inland Revenue Service (FIRS) and obtain a Tax Identification Number (TIN). Without this, your business is not in the government’s tax record. But that doesn’t mean you’re invisible. One day, you’ll need to apply for a loan, bid for a government contract, or open a corporate bank account—and your non-compliance will surface.
Worse, if FIRS discovers your operations before you come forward, you may be liable for back taxes, penalties, and interest. A friend who runs a logistics firm learned this the hard way. After operating informally for two years, he applied for a loan, only to be flagged for non-remittance. FIRS traced his business bank inflows and hit him with a bill that almost sank the company.
2. Confusing Personal Income Tax with Company Income Tax
This is a trap for both registered and unregistered businesses. Many sole proprietors think paying Personal Income Tax (PIT) to the state covers all tax obligations. Wrong.
Once you register a Limited Liability Company (LLC), the entity becomes separate from you. It must file its own tax returns and pay Company Income Tax (CIT) to FIRS. If you’re not filing company returns, FIRS may assume you’re evading tax—and when they come, they come with full force.
It gets worse if you also hire staff but fail to deduct and remit Pay-As-You-Earn (PAYE) tax to the state government. That’s double trouble.
3. Failure to Understand VAT Implications
Value Added Tax (VAT) is one of the most abused and misunderstood taxes in Nigeria. If your business sells goods or services above the VAT threshold (₦25 million annual turnover), you’re required to register for VAT, charge customers 7.5%, and remit it to FIRS monthly.
Here’s the trap: even businesses below the threshold still get caught when they deal with larger companies or government agencies. Why? Because these clients often ask for a VAT invoice and evidence of VAT compliance. If you can’t provide it, they drop you or flag you during audit.
I know a creative agency that lost a recurring government contract because they weren’t VAT-compliant. They thought “small businesses don’t pay VAT.” No one told them that once you deal with structured organisations, your compliance status is as important as your service.
4. Lack of Proper Bookkeeping and Financial Records
FIRS doesn’t guess your income. They estimate it based on your records—or your bank statements if you have no books. If you can’t prove your expenses or revenue sources, you’ll be taxed on gross inflows, not actual profit.
A restaurant owner I consulted for recently received a ₦4.8 million tax demand because she had no formal books. FIRS used her POS inflows for assessment. Meanwhile, over 40% of that money went to suppliers, logistics, salaries, and losses. No records. No mercy.
You don’t need complex software. A simple Excel sheet or basic accounting app is enough. But ignoring your records is an invitation to financial trouble.
5. Unawareness of Tax Reliefs and Incentives
This one is sad: many small businesses suffer under tax burdens they could have avoided—just because they didn’t know they were entitled to reliefs and exemptions.
For example:
- Businesses with less than ₦25 million annual turnover are exempt from Company Income Tax.
- Startups in certain sectors may enjoy pioneer status for up to 5 years—paying zero CIT.
- Donations made by registered NGOs are tax-deductible if properly documented.
- Small businesses that register early and file on time often avoid penalties.
But you only benefit if you know what exists and act accordingly. Many don’t. They pay more than they should—or worse, get fined for late filing of taxes they weren’t even required to pay.
6. Multiple Taxation by State and Local Authorities
This is perhaps the most painful trap—especially for small business owners in the informal sector. Apart from FIRS taxes, you also face state and local levies like:
- Business premises levy
- Environmental tax
- Market levies
- Local signage permits
- Vehicle radio or entertainment taxes (yes, they exist)
Sometimes, these taxes are not even legal. But because business owners don’t know their rights, they pay out of fear or to “settle” touts. The real problem is that these levies pile up without clear documentation, cutting into your working capital and profits.
7. The Trap of Late Filing and Non-Remittance
Even when business owners know their tax obligations, many fail to file or remit on time. Some assume that once you don’t make profit, you don’t have to file. Wrong again.
FIRS expects you to file nil returns if there’s no activity. Failure attracts penalties. The system is automated now—once deadlines pass, penalties start counting.
For Company Income Tax, the penalty is ₦25,000 for the first month of failure and ₦5,000 for each subsequent month. It adds up quickly. Some SMEs have closed down not because they weren’t profitable, but because fines exceeded their revenue.
What You Should Do Today
- Register your business properly. Don’t operate informally.
- Get a TIN and open a tax file with FIRS and your state tax board.
- Understand your tax type: PIT, CIT, VAT, PAYE, etc.
- Keep proper records—income, expenses, payroll, invoices.
- File on time even if you made no profit.
- Don’t assume exemption—verify it.
- Engage a tax consultant at least once a year for clarity.
- Challenge illegal taxes. Know your rights.
The Nigerian tax landscape is not always fair or efficient. But it’s getting stricter. Technology is closing the loopholes. Bank accounts, BVNs, and even POS systems are being monitored. If you don’t regularize your tax affairs, you’re walking on thin ice.
Tax alone doesn’t kill a business. But tax ignorance does. Don’t be that entrepreneur who builds something promising, only to have it wrecked by a simple tax letter.
Start right. Stay informed. Protect your business.
Opeyemi Oladimeji (LLB, MSc, MBA, NPLM, ACIPM) is the Lead Consultant of DMJ-Global Consulting Limited, and the Team Lead of Future Builders Initiative (FBI). He is an academic researcher, legal analyst, and nonprofit leader specializing in management, resource mobilization and corporate governance. He helps entrepreneurs and organizations build strong foundations for sustainable growth.
