I have issued a tutorial on this blog on how to calculate vat in Nigeria. Whilst that was the principle behind the calculation of Vat, I observed from a recent interaction with the FIRS a more practical way of calculating Vat. The second method whilst not very thorough, uses the same principle I explained and is also quite straightforward.
An average Tax Office at The Federal Inland Revenue deals with thousands of tax payers who they access almost on a monthly basis. To ensure their work is made simple, they have to flesh out practical ways of getting things done to ensure every tax payer is assessed in a timely manner and the vat remittances obtained on time. This also affects the way they compute vat payments on the go and that is why they rely on a more pragmatic approach.
What do they do?
They calculate your Vat payments by subtracting 5% of your Cost of Sale (Direct Cost) from 5% of your Turnover (sales/revenue). For example, if you had recorded total sales for the year of N10million and Cost of Sales of N5million and then Admin Expenses N3million, then your vat payment will be as follows;
Revenue – N10,000,000 X 5% = N500,000
Cost of Sale – N5,000,000 X 5% = N250,000
Vat Payable = N250,000
*Note As a double check, After using this method to estimate your Vat remittances they cross check it against the amount you have remitted during the period. If it is less than N250,000 they will ask you to make up the difference.
Why is this important
What this means is that the higher your cost of sales the likely lower your Vat remittances may be. Using the example above, assuming your cost of sale was N6million (not N5million) and your Admin Expenses was N2million (Not N3million). Your profit still remains N2million because all you have done is not reclassify your expenses. However, your Vat input suddenly rises to N300,000 and then you are expected to have remitted no less than N200,000 saving you N50,000 in cash.
In addition and Like I mentioned, the principle of this is in line with how Vat is calculated which is Deduct Vat Input (Vat paid for purchases) from Vat Output (Vat collected from Revenue). Therefore, if you operate an inefficient system in your organisation where Vat on purchases is not properly tracked or recorded, how you classify your cost of sales can significantly affect what you will remit as Vat at the end of the period. For example, Assuming you actually had paid N600,000 in Vat payments on your purchased during the period instead of the N250,000 calculated above, then rather than have a Vat credit of N100k you end up paying N250k because in Vat remittance because of your inability to claim beyond the N250,000 due to your cost of sale.
Why is this so?
It could be due to accounting entries. Because accounting is done on an accrual basis, some of your purchased may not have been consumed or translated into revenue in the period under review. So rather than get your full Vat input claims this period you will claim it in the next period or next accounting year.
It is important to however note that regardless of the way the Vat is calculated by the FIRS, it is still incumbent on the tax payer to have proper records of his Vat deductions and payments. You must not wait till the end of the year to remit Vat. Vat remittances must be made monthly to avoid paying punitive penalties. The FIRS can also conduct further assessments or investigations on your financials even after issuing you a demand notice to pay Vat in a prior period.