The Categorical Exclusion of Professional Service Providers from “Small Company” Status Under Section 202 of the Nigeria Tax Act, 2025: Legal Implications, Structural Dilemmas, and Strategic Responses

1. Introduction

The enactment of the Nigeria Tax Act, 2025 (the “Act”) represents a transformative shift in the nation’s fiscal architecture. Among its most consequential reforms is the introduction of Section 202, which fundamentally alters the taxation of companies providing “professional services”. Historically, small company classification provided significant fiscal relief, notably exemptions from Companies Income Tax (CIT) for entities falling below specific turnover thresholds. Section 202 terminates this preferential treatment for professional service providers, regardless of their size or actual income. This article examines the statutory framework of this exclusion, the policy rationale behind it, and its practical ramifications for law firms and other regulated professionals.

2. The Statutory Framework: Analyzing Section 202

The Act defines a “small company” primarily by reference to gross turnover thresholds. However, Section 202 introduces a decisive proviso that carves out an exception for specific sectors. The provision states in substance:

“A small company means a company whose gross turnover does not exceed the prescribed threshold within the relevant year of assessment; provided that a company engaged in professional services shall not be classified as a small company for the purposes of this Act.”

The legal effect of this proviso is categorical and non-discretionary. For professional service providers, turnover is no longer the determining factor; the nature of the service itself creates a statutory disqualification from small company benefits. Consequently, an incorporated law firm or medical practice with ₦15 million annual turnover is denied the tax exemptions available to a retail company with the same revenue.

3. Defining the Scope of “Professional Services”

A central legal issue involves the definition of “professional services,” which the Act interprets to include services requiring specialized education, certification, licensing, and regulatory oversight.

• Regulated Sectors: The definition encompasses legal practitioners (regulated by the Legal Practitioners Act), accountants (ICAN), medical and dental practitioners, architects, engineers, and tax consultants.
• Borderline Ambiguities: The absence of an exhaustive list creates interpretational risks for emerging sectors such as tech consultants, legal-tech startups, and management advisory firms. These borderline cases may eventually require judicial clarification by the Tax Appeal Tribunal.

4. Policy Rationale and Doctrinal Critique

The legislature appears to have pursued several objectives with this exclusion:

• Revenue Protection: Professional services are often high-margin, knowledge-driven industries where income profiles do not necessarily reflect the capital intensity of trading companies.
• Anti-Avoidance: There were concerns that professionals might artificially fragment their practices into multiple small entities to stay below turnover thresholds.
• Perceived Capacity: Government policy assumes knowledge industries have a stronger inherent potential for income generation.

Critique: Critics argue that this blanket approach ignores economic realities. The law fails to distinguish between a multi-office commercial firm and a struggling boutique practice in a provincial town. This creates equity concerns, as small professional practices may face higher tax burdens than more profitable retail counterparts, potentially increasing legal fees and reducing access to justice.

5. Structural Dilemmas: Business Name, LLC, or LLP?

Section 202 forces professionals to re-evaluate their choice of legal entity.

• Business Name (Sole Proprietorship/Partnership): Income is taxed under the Personal Income Tax framework rather than corporate tax. While this avoids Section 202, it exposes the professional to unlimited personal liability, which is dangerous in high-risk advisory or escrow matters.
• Limited Liability Company (LLC): Offers strong governance and liability protection but is now expressly excluded from small company tax relief.
• Limited Liability Partnership (LLP): This hybrid structure provides limited liability for partners while maintaining partnership flexibility. Depending on regulatory interpretation, an LLP may offer tax treatment closer to personal income tax rather than corporate tax, making it a pragmatic middle ground for many modern practices.

6. Operational Rigor: The Discipline of Financial Governance

Because professional companies face full tax exposure, meticulous financial discipline is now a survival requirement rather than a choice.

• Record Keeping: Tax is assessed on profit, not turnover. Firms must maintain proper ledgers and documentation for all allowable deductions, including rent, salaries, professional indemnity insurance, and continuing education, to avoid inflated taxable profit.
• Invoicing Discipline: Every service should be supported by a sequentially numbered, formal invoice detailing the service, date, and applicable taxes.
• Separation of Accounts: It is legally and ethically mandatory to separate Firm Operating Accounts from Client Accounts (Trust/Escrow Accounts). Client funds are liabilities, not revenue, and improper mixing can lead to artificial inflation of turnover during tax audits.
• Bank Referencing: Electronic audit trails with clear transaction narrations are essential for defending tax positions.

7. Tax Intermediary Obligations: VAT and Withholding Tax

Professional firms act as tax intermediaries, which introduces additional compliance burdens.

• Value Added Tax (VAT): Firms must charge VAT on professional fees. If a client refuses to pay, the firm remains liable to remit the tax to the government, effectively eroding its own profit.
• Withholding Tax (WHT): Clients deduct WHT from fees as an advance tax payment. Firms must rigorously track these deductions and secure WHT credit notes; otherwise, they risk paying tax twice.
• Disbursements vs. Fees: VAT applies to professional fees and service-related costs (couriers, printing). However, official government fees (CAC filing, court fees, stamp duties) paid in the client’s name are “pure disbursements” and should not attract VAT if no markup is added.

8. Transactional Illustrations

*Note: Admin costs like courier/printing are part of the taxable supply.

9. Strategic Recommendations and Conclusion

Professional firms must adapt to Section 202 through informed analysis rather than emotional reaction.

1. Conduct Tax Modeling: Compare effective tax rates across Business Name, LLC, and LLP structures before restructuring.
2. Institutionalize Compliance: Move away from informal accounting toward digital systems and regular internal audits.
3. Refine Engagement Terms: Clearly state that fees are exclusive of VAT and ensure clients understand WHT obligations.
4. Collective Advocacy: Professional bodies like the NBA and ICAN should engage policymakers to advocate for graduated thresholds or profit-based relief for smaller firms.

Ultimately, Section 202 signals that the Nigerian government views professional services as mature economic actors capable of full tax participation. While the withdrawal of small company relief is a significant challenge, firms that embrace financial transparency and institutional maturity will be best positioned to sustain their practices in this new regulatory era.