Value Added Tax is an indirect form of taxation that is based on the consumption pattern of individuals and companies. In Nigeria VAT is a 5% charge on all goods and services except for those exempted. Organisations are by law expected to remit VAT charged to invoices on behalf of the Federal Inland Revenue Service. However, in remitting the taxes to the FIRS, organisations are also expected to deduct certain Vat expense (called Input) Vat that they also incur.

How to deduct

Companies typically include a 5% Vat on a invoices for services rendered or for sale of goods. For example, if you buy a Television set from Mega Plaza for N100,000, that amount will include a Vat of N4,761.90. That is N100,000/1.05=N95,238.10. N100,000 less N95,238.10= N4,761.90. But surely Mega Plaza is not in the business of Manufacturing TV’s since they are mainly a retail outlet. This means Mega Plaza must have purchased the TV at a lower price before adding their Mark Up and Vat to arrive at the selling price of N100,000. Supposing that the TV cost Mega Plaza N85,000 inclusive of Vat of 5%? Therefore Mega Plaza paid a sum of N3,809.52 in Vat.

Based on the above, we can now calculate how much Mega Plaza is to remit to the Federal Inland Revenue Service.

Vat Output (Vat included in invoices paid by customers) –  N4,761.90

Vat Input (Vat included in invoices paid to suppliers)     –   N3,809.52

Vat Remittable to the FIRS                                                       –              N952.38

Note:

Basically, the Law only includes in the VAT input tax on goods purchased or imported directly for resale and goods which form the stock in trade used for the direct production of any new product on which the output tax is charged. It therefore does not include input vat on any overhead, services, admin and general expenses pf any business. The belief is that these expenses will be deducted before arriving at taxable profits. 

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What does this mean?

Not all items can be classified as Vat Inputs. For example, apart from paying 5% Vat on the TV set purchased for resale, Mega Plaza may also have incurred marketing cost & advertising before the TV set is sold. Lets assume they spent N1,000 in marketing cost to sell the TV for N100,000. The N1,000 marketing cost includes a 5% Vat which is N47.62. This amount cannot be offset against the Vat Output above of N4,761.90. This extends to Vat paid to lawyers, consultants, furniture and fittings, bank charges etc. What you therefore need to include as Input Vat are items that are directly related to the item or service that you are selling.

Another Example

A retaurant and bar incurred vat on the following expenses

Furniture & Fittings in the bar – N100,000

Vat on light and telephone bills – N20,000

Vat paid on purchase of alcoholic drinks – N35,000

Vat on paid on Kitchen Materials such as knives and forks – N30,000

Vat paid on Rent – N75,000

Vat paid on Bank Charges – N20,000

Vat Output

Total Vat on Sale of Drinks and Food – N250,000

Amount to remit

Vat Output     –                               N250,000

Less,

Vat Paid on Alcoholic Drinks   – N35,000

Vat Paid on Kitchen Materials  – N30,000

Total Vat Input                             – N65,000

Total Vat Payable   (250k-65k) – 185,000

 

40 COMMENTS

  1. Nice article Ugo. The treatment of VAT on kitchen materials can be argued to be non-claimable as kitchen items as forks, knifes etc may form part of the ASSETS of the business and not as part of a sale. VAT on Disposable cutlery and packs however might be classified as claimable. What are your thoughts?

  2. i am a service provider and in my quest for knowledge on how to file VAT returns, I stumbled on your site, helpful hints.. . .now I know VAT is calculated on service charge only.

    What about personal tax?

    Pls send further help, if any.

    Thank you.

  3. Your calculation of VAT Input on N85,000 is incorrect. The amount is stated as VAT Inclusive hence the VAT Input implicit is calculated as 5/105*85000 = 4047.619048

    Great Article and quite Illustrative by the way. Recommended for people

  4. Very helpful article but I will like to ask questions and I’ll need ur answers pls.

    Question 1.

    For instance please show the calculation of amount of VAT to be remitted on an item costing 13000 naira and sold for 13500?.

    Question 2A.

    This question may not directly be related to this article but I’m curious to know. For instance a business name is registered and already acquired a TIN but physically not to yet commenced operation noting that there’s a portion in the TIN application form where commencement date of business has been filled, and the business incorporation date has exhausted the initial 6 free months. Is this business liable to pay anything for the period of not operating by the time it wants to start fully?.

    • Question 1. For your sales of N13,500 your vat payable will be N675 (5% of N13.5k). It is also known as the Output VAT. The 13,000 assuming it is the cost of sale will be N650 (5% of 13k) otherwise know as Input Vat. The vat you pay at the end of the day will be N675-N650= N25

      Question 2. You will not pay tax but may be liable to minimum tax if you declare revenues that fall in that bracket.

      Hope this helps.

      Regards

  5. A Quick One: Please how do you VAT Rent in residential or commercial property use, as a property consultant. Do you VAT the Rent or Commission of Rent?

    Thanks for the beautiful piece.

    • Companies that are setup solely for trading in commercial properties are expected to charge rents. This is because the Federal Inland Revenue sees those properties as part of the company’s trading stock and as a result will charge them VAT. This is a different from a regular Landlord who just make an additional income via rent.

  6. I have registered a business name and as well gotten a TIN. I had hoped to get supply contracts to start but things have not gone quite well and so as not to be in violation of tax laws, I am thinking of de-registering the business nameand I want to know if this is possiblle and what do you advise

    • Hi, I am not so sure about de-registering your business, however you can liquidate it if you feel it is no longer in operations. You can also write to the tax authority or visit them for more information.

  7. I am quite confused on where I fall in this taxation issues. For instace I am an exerienced mechanical engineer working with a company and the company deducts payee from my salary but on my own time I make money from helping some of my contacts source for materials to execute their supply contracts. My question are as followws
    1. How do I categorise this extra income dat comes from time to time for taxation because they run into several thousands
    2. If I have to register a business name for this work that I do on my own time, will it not be illegal since I am already employed and if it is not illegal how what category will the business name fall into

    • Hi, You should pay tax on the additional income you make by filing a self assessment form at the state tax office where you reside. That income will be taxed under the personal income tax act. There is no law against registering a company, however check that your current terms of employment does not restrict you from engaging in activities or owning or being part of a business that is in direct competition with your current place of employment.

  8. How much VAT is deductible by a Ministry of government from the fees of a firm (registered as a business name) it has engaged for consultancy services? 5% or 10%?

  9. nice input. My question is this:
    We have a company that does smoothie drink and sell on a daily basis. at the end of each month how do we calculate our tax to remit to the FIRS. thanks.

  10. i am wondering about a business in nigeria that means i but goods for resale from europe where cos i am resident i pay 20% vat. how will that be worked out in nigerian tax after i have sold the item? now in all honesty, in some situations i can get the vat back depending on how i ship and who i buy from. but in situations were i can’t – again being resident in europe but also nigerian???

  11. Help required on WHT deduction at source.

    Background
    A company enters a service contract with a supplier for the provision of life support and misc. daily supplies of food and other consumables.
    The contract stipulates that the contractor will charge the cost of purchases (along with proof of purchase) and add a service charge of 10%.

    Suppliers invoice

    Cost of supplies N 1,000
    Service Charge @ 10% N 100
    Total Supplies N 1,100
    VAT @ 5% N 55
    Invoice total N 1,155

    Question

    Is the supplier charging correct VAT on total supplies which is cost plus service charge? Should it not be only on the service element of N 100?
    Please also suggest on whether WHT should be deducted on Total supplies or Invoice total or only the service element of N 100.
    Assuming the cost of supplies is treated as reimbursement.

    Thanks.
    Ali

    • The correct VAT should be charged on Value of services rendered of #1,000 and not #1,100. Also on WHT, it should be charged on # service charge of #1,100.

  12. Question: If I have a contract to supply item X and I charge client VAT on my invoice. Client deducts VAT & WHT. Item X for supplied was purchased with VAT, which means VAT remitable is not acctually what I charged on my invoice but still the entire amount is remitted on my behalf by my client. How do we resolve this as technically I am now being owed by the government.

    Does one then apply for tax refunds and use that againts my payable income taxes at the end of the year? I think I understand how it works but would like to know real case scenario in Nigeria.

  13. Does the man selling provission on the street pay VAT also? And whose soucers of funding the business depend on Bank loan pay VAT as well?

  14. On quotation, if the project is 10million less Vat, how much will I invoice including Vat and also how much will the client pay me?

  15. plx i need an urgent reply plxxx, a company that has many branches and now opened a new branch should they still use the same tin no in remitting taxes in that new state they just commenced operations,i want to know if it wont be a double taxation if am to remit in that new state wth dat same tin no

  16. This article has helped alot, but what are the charges to be deducted before calculating VAT? esp. for a kind of business that do delivery.

  17. Pls how do I calculate my VAT as a construction firm. For instance, I got a contract of 3,000,000 and I executed it with 2,6000,000. How much will pay as VAT. Pls I need a urgent response. Thanks

  18. this is a new company two month old and just got a contract of 35,000, present i hava my TIN Number,
    The job was executed for 28,000 after materials with receipt and labour.
    My question is how am suppose to remit?

  19. Very informative …my question is , as a key distributor of a product manufactured in Nigeria. Do I need to pay Vat ? Considering the company that manufactures the goods already do pay Vat . Thanks

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