Posted on August 25, 2016 by Nairametrics

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.