Value Added Tax (VAT): Explained for the Amateur

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In life, there are TWO constants, death, and taxes.

There is nothing we can do (for now) about death, but we can do our best to learn about our taxes, to keep them as low as possible.

So let me tell you about taxes, Value Added Taxes (VAT) in particular.

What is VAT?

VAT is a tax levied on goods and services instead of income or profit. It falls under the category of Indirect taxes. You’ve probably seen the letters on a receipt, but that receipt won’t explain why you’re paying a little more than your stuff actually costs. I will.

It was introduced to Nigeria in 1993 through the VAT Act No. 102 of 1993. Since then, it has been amended a couple of times, most recently in 2019, through the finance act. The purpose (as with all taxes) is to drive up revenue for the government. And it’s easier for the FIRS (Federal Inland Revenue Service) to get that revenue through VAT than through direct taxes, like PIT (Personal Income Tax).

What terms should I know?

To understand VAT, you have to understand the terminology used around it. These terms are:

  • Taxable person – anyone who engages in economic activity to obtain income.
  • Taxable goods and services – the goods and services which are not exempt from VAT or on a zero-rate charge.
  • Input tax – the tax paid by a taxable person to the supplier from whom he/she buys taxable goods or services.
  • Output tax – the tax collected upon sale of taxable goods or services to a third party, like an agent or a customer.

Who needs to pay?

“Taxable persons”. And for tax purposes, incorporated companies are “persons”. The amendments in the 2019 finance act relieve small businesses of this responsibility. The amendment also makes micro-finance banks exempt from registration.  This means only companies with an annual turnover greater than N25,000,000 have to register for VAT, charge for VAT (i.e., add the cost of VAT to its sales price), and file returns every month.

To which “Goods and Services” should I add VAT?

For VAT, goods and services are split into three categories:

  • Exempt Items – These items have no VAT charged on them. They cover (but are not limited to) baby products, medical products and services, agricultural products, educational products and services, exports, and the recent addition of female hygiene products.
  • Zero rate Items – These goods and services are under the VAT Act. However, the applicable rate on them is zero. Items like Non-oil exports, products purchased by diplomats, and humanitarian donor-funded non-profit projects fall under this category.
  • Standard rate Items – These are all the items that do not fall under the exempt status or the zero-rate status. They are the goods and services that you (a taxable person) have to add VAT to. The current VAT rate in Nigeria is 7.5%, so your sales price plus 7.5% of that sales price is what the customer pays.

How do I get compliant?

The VAT act sets out the compliance rules. So, if you ought to be paying, these are the rules:

  1. VAT Registration should take place with the commencement of the business. The word commencement can mean several different things depending on the nature of the business, so it’s best to register as early as literally possible.
  2. You should file VAT returns on or before the 21st day of the month for transactions that took place during the prior month.
  3. All records and relevant documents should be kept to be made available on-demand, in the event of a VAT drive or an audit by the Tax authorities.

You should file your VAT liability using VAT Form 002. You can get it at a Tax Office near you. On it, you will calculate the amount of Output VAT you owe based on the sales you made during the month. Then you will offset that against the Input VAT you already paid for taxable goods and services. The difference is what you will pay and file as your returns. Remember that the applicable tax rate is now 7.5%.

What happens if I say No?

If you refuse to register or pay when you should, you’ll pay more later. 

That’s just how it works.

  • If you don’t register for VAT when your business “commences” you’ll have to pay a fine of N50,000 for the first month and N25,000 for every subsequent month that you don’t pay.
  • If you don’t charge VAT on your products, then you’ll have to pay a fine of up to 50% on the cost of the product.
  • If you don’t file your returns on time, you have to pay N50,000 for the first month and N25,000 for every other month afterward.
  • If you don’t remit the tax you owe by the deadline, you will have to add 10% of the tax owed to what you were already going to pay.

You see, you’re better off saying Yes.

And that’s it. You know all you need to know as a Tax Amateur. While it’s good to have this knowledge, you should run your tax payments through your accountant instead of trying to do it alone. They are trained to make the whole process as seamless as possible, and you’d do well to trust them.

If you found this helpful, please don’t keep it to yourself. Share it with someone else, and let me know in the comments what other finance topics you want to learn about.

Last modified: May 4, 2021

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