BUSINESS INCOME

The term business is defined under section 2(g) of the ITA to include any trade, profession, vocation or
adventure in the nature of trade, but does not include employment
Business income and examples of business income

Business income means any income derived by a person in carrying on a business and includes the following
amounts, whether of a revenue or capital nature:

• The amount of any gain derived by a person on the disposal of a business asset (capital gain), or on the
satisfaction or cancellation of a business debt, whether or not the asset or debt was on revenue or capital
account.

• Any amount derived by a person as consideration for accepting a restriction on the person’s capacity to
carry on business. iii. The gross proceeds derived by a person as consideration for accepting a restriction
on the person’s capacity to carry on business.

iv. The gross proceeds derived by a person from the disposal of trading stock.

v. The value of any gifts derived by a person in the course of, or by virtue of, a past, present, or
prospective business relationship.

vi. interest derived by a person in respect of trade receivables or by a person engaged in the business of
banking or money lending.

Aspects to consider when determining chargeable business income Gross income

▪ Exempt income
▪ Allowable deductions
▪ Non allowable deductions
▪ Capital deductions

Non- allowable deductions

• Any expenditure or loss incurred by a person to the extent to which it is of a domestic or private nature.
• Any expenditure or loss of a capital nature, or any amount included in the cost base of an asset.
• Any expenditure or loss which is recoverable under any insurance, contract, or indemnity.
• Income tax payable in Uganda or a foreign country.
• Any income carried to a reserve fund or capitalized in any way.
• The cost of a gift made directly or indirectly to an individual where the gift is not included in the
individual’s gross income.
1
• Any fine or similar penalty paid to any government or a political subdivision of a government for
breach of any law or subsidiary legislation.

• A contribution or similar payment made to a retirement fund by the employee either for the benefit of
the employee or for the benefit of any other person.

• A premium or similar payment made to a person carrying on a life insurance business on the life of
the person making the premium or on the life of some other person.

• The amount of a pension paid to any person.

• Any alimony or allowance paid under any judicial order or written agreement of separation.
• Any expenditure above five million shillings in one transaction on goods and services from a supplier
who does not have a tax identification number.

2
Determination of taxable business income
Allowable deductions
According to section 22(1) of the ITA, for purposes of ascertaining the chargeable income of a person for a
year of income, there shall be allowed as a deduction:
• All expenditures and losses incurred by the person during the year of income to the extent to which
the expenditures or losses were incurred the production of income.

• The amount of any loss (capital loss) determined under the part dealing with gains and losses on the
disposal of assets, incurred by the person on the disposal of a business asset during the year of income,
whether or not the asset was on revenue or capital account.

• Local service tax paid by an individual.

• 2% of income tax payable by private employers who prove to URA that 5% of their employees on full
time basis is persons with disabilities. The allowable deductions constitute revenue expenditure and
capital deductions (allowances- depreciation for tax purposes). The specific deductions allowed under
the ITA are specified in sections 23-26 and include the following:

• Meals refreshment and entertainment expenditure

The above expenditure is allowable only where:

The value of the meals, refreshment, or entertainment is included in the employment income of an employee
under section 19(1) b – as a taxable benefit or is excluded from employment income by section 19(2)( d)-
incurred while undertaking travel on duties of employment or (e) – provided to all staff in employer’s premises
on equal terms; or

The person’s business includes the provision of meals, refreshment, or entertainment and recipient has paid
an arm’s length consideration for them.

• Bad debts
Bad debts written off are allowable in the year of income in which they are written off only if the
amount of the debt claim was:

- Included in the person’s gross income in any year of income; or

- In respect of money lent in the ordinary course of a business carried on by a financial institution.

For persons other than financial institutions, a bad debt is allowed as a deduction only if all reasonable steps
for recovery have been taken and there are reasonable grounds that the debt will not be recovered.

3
For financial institutions, specific reserves (provisions) for identified losses or potential losses are allowable
as a deduction, that is, bad debts provided for in accordance with the Bank of Uganda Regulations.

• Interest
Interest expense is allowable to the extent that the debt obligation has been incurred by the person in
the production of income in gross income.
• Training expenditure
An employer is allowed a deduction for expenditure incurred during the year for the training or tertiary
education, not exceeding in the aggregate five years, of a citizen or permanent resident of Uganda,
other than an associate of the employer, who is employed by the employer’s business, the income of
which is included in gross income. Permanent resident means a resident individual who has been
present in Uganda for a period or periods in total of five years or more.

• Charitable donations. Donations /gifts made to an organization within section 2(bb) (i) (A) or (B) of
the definitions of “exempt organizations” are allowable. The allowable amount for a year of income
shall not exceed five percent (5%) of the person’s chargeable income, calculated before taking into
account the donation.

Capital deductions (allowances)

Capital allowances are deductions claimable for the wear and tear of qualifying assets used in
production of income such as machinery, office equipment and buildings. Capital allowances are
generally granted in place of depreciation, which is not deductible.

Generally, a business will claim capital deduction on capital expenditure including the following:

• Repairs and minor capital equipment.

• Depreciation of depreciable assets (wear and tear).
• Industrial buildings deduction (IBD).
• Start-up costs.
• Costs of intangible assets. Scientific research expenditure Farming expenditure.

Meaning of qualifying capital expenditure

Qualifying capital expenditure refers to expenditure incurred in the acquisition of depreciable assets that are
used or held ready for use, wholly or partly by the business for production of income but exclude trading stock.
Types of capital expenditures

• Minor capital equipment

4
 According to section 26(2) of the ITA, a person is allowed a deduction for expenditure incurred during
the year of income in acquiring a depreciable asset with a cost base of less than fifty (50) currency
points (UGX 1 million) However, this will only apply if the asset in question normally functions in
its own right and is not an individual item which forms part of a set.

• Depreciation of the depreciable assets (wear and tear)

According to section 27 of the ITA, a person is allowed a deduction for the depreciation of the person’s
depreciable assets other than minor capital during the year of income as calculated according to the
following formula AX B

Where; A- is the written down value (W D V) of the pool at the end of the year. of income; and B -is
the depreciation rate applicable to the pool.
The tax written down value (A in the formula) is comprised of:

• The WDV of the pool at the end of the preceding year of income after allowing for the depreciation
value (wear & tear);

• The cost base of assets added to the pool during the year; and
• Reduced but not below zero by the consideration received from the disposal of assets in the pool during
the year of income.
For the purpose of determining the rate to be used (B in the formula); the depreciable assets are
classified in four classes (sixth schedule – part 1) as below.
Class Assets included Rate
1 Computers and data handling equipment (also includes software) 40%
2 Plant and machinery used in farming, manufacturing and mining 30%
3 Automobiles; buses, minibuses, goods vehicles, construction and earthmoving 20%
equipment, specialized trucks, tractors, trailer and trailer mounted containers, rail
cars, local motives and equipment; vessels, barges, tugs and similar water
transportation equipment; aircraft; specialized utility plant, equipment and
machinery; office furniture, fixtures and equipment, any depreciable asset not
included in another class

Restricted depreciation ceiling (cost base for wear and tear not to exceed UGX 60 million).

The cost base of a road vehicle, other than a commercial vehicle, should not exceed sixty million shillings.

5
 • Commercial vehicle means road vehicle designed to carry loads of more than half a ton or more than
13 passengers.

• Vehicle used in transportation or vehicle rental business.

A non-commercial vehicle is one not meeting the above conditions and shall have the cost base for
purposes of wear and tear restricted to UGX 60,000,000 where the cost exceed UGX 60 million (referred
to as an expensive car). A good example is a Mercedes Benz cross country costing UGX 120,000,000
which shall only get wear and tear on UGX 60,000,000 of the cost.

• Industrial building allowance (deduction) (IBA or IBD)

A Person who has incurred capital expenditure in any year of income on the construction of an industrial
building and the building is used by the person during the year of income in the production of income
included in gross income, is allowed a deduction for the depreciation of the building during the year of
income calculated according to the following formula: AX B X C/D
Where A is the depreciation rate applicable to the building as determined under part III of the sixth
Schedule (5% on straight line)
A is the capital expenditure incurred in the construction of the building
B is the number of days in the year of income during which the asset was used or was available for use in
the production of income included in gross income
C is the number of days in the year of income (365 days)

Example:
Roofings Company Ltd owns a recently constructed commercial building in Kampala. The building that cost
of USHS 3 billion was completed and put to use on 1 July 2020. Required. Compute the IBD the company
will be entitled to claim for the year ended 30th June 2023.

Solution:

IBD = 5% X 3,000,000,000 X 365/365 = USHS 150,000,000

Where an industrial building is only partly used by a person during a year of income for prescribed uses, the
amount of the depreciation deduction allowed shall be proportionately reduced.

Where an industrial building is only partly used by a person during a year of income for prescribed uses and
the capital expenditure incurred in the construction of that part of the building used for other uses is not more
than 10% of the total capital expenditure incurred on the construction of the building, the building is treated
as wholly used for prescribed uses.

6
Where a person has incurred expenditure in making a capital improvement to an industrial building in a year
of income, the expenditure is treated as capital expenditure incurred in that year in the construction of a
separate industrial building.

Where an industrial building is purchased by a person, the person is deemed to have incurred the capital
expenditure incurred by the person who constructed the building.

Where an industrial building is bought and sold together with land, the value of the land shall be the difference
between the total consideration and the value of the industrial building after allowing for any deductions.

Example

Tinah Company Ltd owns a recently constructed commercial building in Mbarara. The building that cost of
UGX 5 billion was completed and put to use on 1 July 2015. Tinah Company Directors use 20% of the building
space for their personal work. Required: Compute the IBD the company will be entitled to claim for the year
ended 30 June 2016.

Solution:

IBD =A X B X C/D

Cost allowed for IBD = 80% X 5bn = Uses 4,000,000,000

IBD = 5% X 4,000,000,000 X 365/365 = USHS 200,000,000

The private use is 20%, therefore, apportioned. The 20% is not allowed for IBD. Start –up costs
A person who has incurred expenditure in starting up a business to produce income included in gross
income or in the initial offering at the stock market shall be allowed a deduction of an amount equal to 25%
of the amount of the expenditure in the year of income in which the expenditure was incurred and in the
following three years of income in which the business is carried on by the person. Expenditure in
starting up a business means:

i. In the case of initial public offering, costs incurred in listing the business with the Uganda stock
Exchange; and

ii. In any other case, non-recurring preliminary or pre-opening costs, which are associated with setting
up a business such as fees of an accountant, registration charges, legal fees, costs for promotional and
advertising activities, as well as costs for employee training.

Example
7
Roofings Group Ltd incurred the following costs, which are associated with setting up before starting of
company operations:

Accountant fees 62,000,000

Registration fees 20,000,000
Legal fees 65,000,000
Promotional and advertising 50,000,000
Employee training 30,000,000
Total expenses 227,000,000

Required:
State the treatment of the above expenditures as per then income Tax Act Cap 340 Solution:

The total expenses of shs 227,000,000 will be added back in the tax computation for the year ended 30 June
2021 and 25% of the costs (25% x 227,000,000) which is USHS 56,750,000 will be allowed for the year and
for the subsequent three years.

Costs of intangible Assets

A person who has incurred expenditure in acquiring an intangible asset having an ascertainable useful life is
allowed a deduction in each year of income during the useful life of the asset in which the person wholly uses
the asset in the production of income included in gross income of an amount calculated according to the
following formula:

A/B Where A is the amount of expenditure incurred; and is the useful life of the asset in whole years.

Scientific research expenditure

It is an allowable deduction where it meets the set criteria. scientific research means any activities in the
fields of natural or applied science for the development of human knowledge while scientific research
expenditure, means cost of scientific research undertaken for the purposes of developing the person’s
business, including any contribution to a scientific research institution but does not include:

• Expenditure incurred for the acquisition of a depreciable or intangible asset;

• Expenditure incurred for the acquisition of land or buildings; or
• Expenditure incurred for the purpose of ascertaining the existence, location, extent, or quality of a
natural deposit.
Scientific research institution means an association, institute, college, or university which undertakes scientific
research.

8
Small tax payer and the implications of presumptive income tax
Every person carrying on a business is ordinary obliged to declare his liability to tax through submission of a
return of income which is accompanied by a set of accounts or financial statements. Preparation of accounts
would for most taxpayer’s demand hiring professional services of a qualified accountant. The process and cost
of preparing and submitting a return of income (and accounts) would be very expensive and will make it
impossible for some taxpayers to voluntarily comply with the statutory requirements declare their liability. It
is because of the unique difficulties experienced by small taxpayers that provisions in section 4(5) - (7) were
included in the Act.

Section 4(5) defines a simplified and easy method of computing tax payable by a resident taxpayer carrying
on a small business. If for any year of income, a resident tax payer derives gross turnover from carrying a
business or businesses which is less than one hundred fifty million shillings(150m), then such tax payer’s
income tax payable would be determined in accordance with the rates of tax defined in the second schedule
to the ITA.

Gross turnover, is defined in section 2 to mean the gross proceeds from carrying on a business or businesses
during a year of income (without taking account of the deduction for expenditures and losses)

Where a taxpayer carries on more than one business during a year of income, the gross turnover from all the
businesses is aggregated to determine whether the tax payer is under the threshold.

Other issues raised in section 4(5) about small business income tax are:

The income tax payable under this provision is a final tax on the business income of the taxpayer.

i. No tax credits are allowed to reduce the income tax payable by the small business taxpayer, except that
relating to amounts included in the gross turnover of the taxpayer like: Withholding tax; and
Provision tax.

Computation of tax liability of small business Taxpayers

• The tax payable is calculated and determined on the basis of different thresholds provided in the second
schedule of the ITA.
• Taxpayer’s whose gross turnover exceeds 10 million shillings but does not exceed 150 million shillings
will be required to pay their taxes as per the schedule below.

Small Business Taxpayers

9
 Without
Gross Turnover With records
records

Not exceeding Shs 10 million NIL NIL

0.4% of annual turnover in

Exceeding Shs 10 million but does not
excess of Shs 80,000
exceed Shs 30 million per annum.
Shs 10 million.

Exceeding Shs 30 million but does not Shs 80,000 plus 0.5% of annual Shs
exceed Shs 50 million per annum. turnover in excess of Shs 30 million. 200,000

Exceeding Shs 50 million but does not Shs 180,000 plus 0.6% of annual Shs
exceed Shs 80 million per annum. turnover in excess of Shs 50 million. 400,000

Exceeding Shs 80 million but does not Shs 360,000 plus 0.7% of annual Shs
exceed Shs 150 million per annum. turnover in excess of Shs 80 million. 900,000

10