Who gets what? VAT and WHT Deductions From Invoice Explained


We have been inundated with messages from some of our readers confused about the application of Value Added Tax and Withholding Tax when paying for invoices provided by vendors.

Don’t be hard on yourself if you do not understand as most accountants also find it hard to figure these things out. Tax can be quite confusing which is why as a small business owner, you should always have a tax consultant by your side.

To explain better we will use a scenario.

Jideowo Ltd is a supplier of printing and stationery and got a contract to supply stationery to MoMoney Ltd for an invoice value of N100,000. Being a Vatable item, JideOwo Ltd adds a 5% VAT to the contract sum bringing the total amount to N105,000. His invoice looks a bit like this.

Jide Owo Invoice

What withholding Tax to deduct

Upon receiving this invoice, the accounts department of MoMoney deduct 5% WHT from the invoice and schedule a payment of N100,000 in favor of Jideowo Ltd. They then remit the deducted N5,000 to the Federal Inland Revenue Service and obtain a withholding tax credit note which they should give to authorized representatives of Jideowo Ltd.

VAT to Remit

Jideowo Ltd upon receiving the payment of N100,000 and Tax credit note of N5,000 will remit a sum of N5,000 to the Federal Inland Revenue as value added tax on the transaction. They will then show the FIRS the WHT credit note of N5,000 which can be used to set-off against future company income taxes.

Break-down of payment (who gets what in cash).

Invoice amount – N105, 000

FIRS    (VAT)     – N5,000

FIRS (WHT)      – N5,000

Jideowo  Ltd      – N95,000

Hope this clarifies this issue once and for all? If you still need further explanation, hit the comment section and a member of our team will be ready to respond.

Nairametrics

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

What others say about : Who gets what? VAT and WHT Deductions From Invoice Explained..


Gbemi

Thanks for your explanation. I have got a question about the withholding tax, why does MoMoney deduct withholding tax and give Jideowo Ltd a WTC note.

Nairametrics

MoMoney does that because the law authorizes them to do so. It is a statutory requirement. If MoMoney does not deduct the tax then they will have to bear the cost and pay it themselves.

Tunde

Not sure I agree fully with it. My understanding is that where Momoney is a VAT agent, they will pay 95k, after deducting VAT and WHT of 5k each. The WHT credit note to be received by Jideowo will then be for 5k. Where Momoney isn’t a VAT agent, then they will pay Jideowo 100. It is there responsibility of Jideowo to remit the 5 of VAT.

Olayemi

Momoney cannot not remit VAT on behalf of Jideowo as Jideowo retains the right to remit its VAT. organisations remit VAT after netting off allowable input VAT which Momoney would deprive Jideowo of if it remit on Jideowo’s behalf. on WHT this is dependent on the Rate applicable and how the Invoice is structured. in the case above, Jideowo is a limited liability company and would be liable to a 10% WHT deducted by Momoney as explained by Nairametrics.

Tunde

Thanks @nairametrics for the clarification. Companies operating in the oil and gas industry are designated as VAT agents and have an obligation to deduct VAT. I hope it’s clearer now Olayemi

Olayemi

thank you Tunde, it is clearer. tax laws can actually be ambiguous sometimes and capable of different interpretations.

AKINYEMI

well, I think otherwise. you are suppose to apply 5% on the amount. which invariably translate to the VAT charge. so what will be the withholding is 5000. which will be deduct by the company, the company then pays 100,000 to the supplier.

ogwuma

Thanks Nairametrics for the breakdown.

However, I want to know how Jideowo would post this transactions in light of the following scenerios:
1. If Momoney is an oil company that is statutorily required to deduct both WHT and VAT and remit on Jideowo’s behalf.

2.If Momoney is just any other company that deducts just witholding tax and leaves Jideowo to remit its VAT i.e pays Jideowo #100,000 and gives him a WHT credit note of #5000.

3. If Momoney pays Jideowo the whole #105,000 so he can remit both WHT and VAT himself.

How do I post this please. I need urgent response. Thanks.

ADEYEMI

I don’t know what to do pls. Am working with a company CNPC as one of there contract staff which at d end of d month they will prepare a voucher that shows analysis of d payment. Under d voucher , there always a column of WHT of about 20,567. But till now , I v not seen my withhold tax credit note till now.. Over 1 year..
What do I do ?

IKem

Where are the accountants. No one to answer this Ogwuma question?

2.If Momoney is just any other company that deducts just witholding tax and leaves Jideowo to remit its VAT i.e pays Jideowo #100,000 and gives him a WHT credit note of #5000.

What's your say?