Introduction

The Organisation for Economic Co-operation and Development (OECD) defines social security contributions as compulsory payments made to the government, granting entitlement to receive future social benefits. In many countries, including Nigeria, both organizations and individuals are mandated to contribute to social security schemes. Nigeria has enacted various legislations to facilitate the funding and administration of social security, such as the Industrial Training Fund Act, Employees Compensation Act, National Health Insurance Act, National Housing Fund Act and the Pension Reforms Act.

However, compliance with these legislations remains inconsistent. Many citizens and companies fail to adhere strictly to the requirements for deducting and remitting social security contributions, often due to perceived difficulties in accessing funds or claims and disputes between companies and regulators.

This article explores the compliance challenges associated with Nigeria’s social security contribution schemes, focusing on the Industrial Training Fund (ITF) and Employees Compensation Scheme (ECS). We also offer recommendations for improving compliance levels.

Compliance and Regulatory Requirements

Industrial Training Fund (ITF)

Established by the Industrial Training Fund Act of 1971, the ITF aims to promote skill acquisition in Nigeria’s industrial and commercial sectors. Employers with an annual turnover of ₦50 million or more, or those employing at least five staff, must contribute 1% of their annual payroll costs to the ITF by April 1 of the following year. Non-compliance results in a 5% monthly interest penalty on unpaid amounts. Employers must also develop a training policy and plan approved by the ITF and maintain records of training conducted throughout the year. They are entitled to a 50% refund of their contributions if they meet the stipulated requirements.

Employees Compensation Scheme (ECS)

The Employees Compensation Act of 2010 establishes the ECS to provide adequate compensation for employees or their dependents in cases of death, injury, disease, or disability arising from employment. Employers must contribute at least 1% of their total monthly payroll to the Employees’ Compensation Fund, managed by the National Social Insurance Trust Fund (NSITF). Late or non-remittance attracts a 10% interest penalty on outstanding amounts.

Compliance Challenges

Despite the government’s intentions, several issues affect compliance levels among companies:

1. Additional Administrative Costs: Many employers see social security contributions as an extra financial burden, particularly the ITF, which adds to mandatory expenses despite existing training budgets. The process to claim the 50% refund is often seen as cumbersome, requiring significant administrative effort that could be better utilized in core business operations.
2. Lengthy Audit Periods and Controversies: Audits by the ITF and NSITF often extend over long periods due to disputes over payroll definitions, such as whether fees paid to Non-Executive Directors (NEDs) should be included. While NEDs are not employees and do not receive monthly salaries, some audits attempt to classify their fees as payroll costs, leading to disagreements.
3. Onerous Refund Process: Although the NECA Agreement stipulates that claims should be resolved within four weeks, in practice, the process is slow and cumbersome, with long-standing claims yet to be settled.
4. Post-COVID-19 Disruptions and Industry Rates: The rise of remote work has led some companies, especially in the service industry, to view ECS contributions as unnecessary due to lower workplace accident risks. Additionally, the fixed contribution rate across all industries does not account for varying risk levels, prompting calls for differentiated rates.

Recommendations for Improving Compliance

To address these challenges and enhance compliance, several measures can be taken:

1. Statutory Amendments: Amend the ITF and ECS Acts to introduce graduated contribution rates based on industry risk and business size. For instance, South Africa exempts employers with annual payrolls below ZAR 500,000 from the Skills Development Levy and applies different rates for high-risk sectors. Similar adjustments in Nigeria could reduce administrative costs for employers.
2. Standardize the Audit and Refund Process: Leverage technology to digitize collection and refund processes, which would reduce compliance costs and expedite dispute resolution. Utilizing digital tools for verification can streamline audits and ensure quicker resolution of outstanding liabilities.

Conclusion

Given the complexity of regulatory compliance and its financial impact on companies, seeking advice from experienced consultants is crucial. Navigating diverse compliance requirements is challenging, and expert guidance can help companies meet their obligations effectively.

By addressing the current compliance challenges and implementing the recommended measures, Nigeria can improve adherence to social security contribution schemes, thereby ensuring a more robust and equitable system for all stakeholders.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, or www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.