We have been inundated with messages from some of our readers who are 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; 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:

Bua group

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

Jide Owo Invoice

What withholding Tax to deduct

Upon receiving this invoice, the accounts department of MoMoney will deduct 5% WHT from it and schedule a payment of N100,000 in favor of Jideowo Ltd. The deducted N5,000 is then remitted to the Federal Inland Revenue Service which issues a withholding tax credit note that should be given to authorized representatives of Jideowo Ltd.

VAT to Remit 

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

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

Invoice amount      –   N105,000.00
FIRS (VAT)             –   N5,000.00
FIRS (WHT)            –   N5,000.00
Jideowo  Limited    –   N95,000.00

Hope we have been able to clarify this issue adequately. If you still need further explanation, hit the comment section and a member of our team will be ready to respond.

This article was first published on Nairametrics on August 26, 2016.

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56 COMMENTS

  1. 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.

    • 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.

  2. 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.

    • 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.

  5. 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.

  8. 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.

  10. 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 ?

  11. 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.

  12. Is WHT and VAT applicable on the interest expenses and interest income of banks deposits and loans & advances respectively?

  13. Good day, if an invoice states #100,000 for services and #5,000 for 5% vat, is it correct to deduct the 10% WHT on the total #105,000 or on #100,000 which is the actual cost of the service.

    • Please can you answer the question below?

      If an invoice states #100,000 for services and #5,000 for 5% vat, is it correct to deduct the 10% WHT on the total #105,000 or on #100,000 which is the actual cost of the service.

  15. Good day, pls if a contract is vat exclusive and no vat is added to the contract sum afterward by the construction firm, will the construction fir still go ahead and remit vat on such project on client company behalf?

    • Yes, the construction firm will still go ahead to remit VAT. Vat will be charged regardless of whether it is net or gross. When a client tells you contract sum if Vat exclusive, they are only trying to push the VAT liability to you.

  18. If an invoice states #100,000 for services and #5,000 for 5% vat, is it correct to deduct the 10% WHT on the total #105,000 or on #100,000 which is the actual cost of the service.

  19. I think we should keep this simple.
    when booking the invoice:
    1. Dr stationery acct with the total value of the invoice 105,000
    Cr Jideowo Ltd (vendor acct) 95,000
    Cr WHT payable 5,000
    Cr VAT payable 5,000
    2. When payment is made:
    Dr Jideowo Ltd (vendor acct) 95,000
    Dr WHT payable 5,000
    Dr VAT payable 5,000
    Cr Bank acct 105,000
    WHT credit note would be collected from revenue (FIRS) for onward transmission to the vendor (Jideowo Ltd) this will be used to offset their income tax at the end of the period.
    VAT in turn will also be paid to FIRS by Jideowo Ltd.

  20. My question goes thus: Jideowo supplied items worth 100,000 and the cost of the goods is 80000 and his profit is 20000. Will the WHT and VAT be on the profit Or on both the cost and profit. If I follow your explanation a time will come if the WHT and VAT is on the total value Jideowo will not make profit because what he’s paying as tax is more than the profit

  21. What is the percentage of WHT on courier company and also is the WHT charge only on the invoice amount with out VAT,example if the invoice amount is 100k VAt is 5% of 100k is 5k .so is the WHT charged only on 100k or 105k ?

  22. hello house. kindly help me out. If you offer by a company to render a service of 115,000, pls i want to know if I will the total value of the contract plus the vat of 5% to it. to make it ₦ 120,750.00

  23. I need a clarification about this. I did some work for firs itself and they have deducted VAT at source and I paid on some other business did with other people .my question is that can I net off the one paid to firs from the ones paid to others and pay the difference as vat payable

  24. clarification about this. I did some work for firs itself and they have deducted VAT at source and I paid on some other business did with other people .my question is that can I net off the one paid to firs from the ones collected from others and pay the difference as vat payable or I still pay all complete without referencing to the one firs deducted

  25. Pls I need your help, I want to submit a quotation to a company and part of the requirement is that vat & wht inclusive, how do I go about it. Pls help

    • You simply charge then a 5% VAT on your invoice amount. You will also need to send them your Tax Identification Number (TIN) to show you are legally allowed to deduct and remit VAT.

  26. Jideowo ltd is a supplier while Momoney is the customer if both company are vatable ie registered with firs then :
    Jideowo ltd will pay 5000 “vat charged” on his invoice to firs while Momoney pays 5000 “wht” not paid on jideowo’s invoice to firs and give wht credit note to Jideowo ltd to settle her same year income tax.

    accounting entries:

    Momoney ltd books:
    Dr Cr

    Printing & staionery account 105k
    wht payable account 5k
    Jideowo ltd (supplier) 100k

    105 105

    Payment:

    Bank 100
    Jideowo ltd 100

  27. I need clarification here please.

    I have an Invoice detailed as follows;

    Amount = 103,000

    Vat = 5,150

    Is the WHT going to be on 103,000 or 108,150 (103,000+5,150)?

    Please respond urgently.

  28. @Nairametrics, I need clarification on this my special case. As an insurance broker, when i receive premium (call it A) directly from clients, i deduct my commission (call it B) first. Then i compute the VAT (call it C) on my commission and deduct further from the balance (call it A minus B). So i remit A minus B minus C to the insurance company.

    When clients pay directly to the insurance company, I expect my commission from the insurance company. They do it this way: they compute my commission and charge WHT on it. Hence I get less than my commission. How do i treat VAT in that case, knowing that WHT has been deducted?

  30. Hello, please what does it mean that the WHT credit note can be used to set off future tax. Is it like an insurance for tax?

    Does it mean if they default later, the paid WHT can be used as an offset?

    Thank you.

  31. Hi,

    thanks for simplifying this but please permit me to ask the difference between VAT and WHT. Also, why apply WHT and VAT in same invoice. finally, what are Vatable Items and what items do you charge WHT on.

  32. Pls i need a clarification on this. I use a friend company name (vat registered) to supply items to a company,the sub total is 100,000,VAT 5% Making 105,000.The company then pay us 105,000 including vat.
    The issue now is my said he will deduct 5% vat and 5% WHT (#10000) from the #105,000.
    PLEASE IS THIS RIGHT?

  33. Hello Nairametrics,

    Apologies for reviving this thread again. Please just for the case of clarity for monthly VAT filing. Please clarify:

    Invoice submitted: N105,000(N100,000 + N5,000)
    Payment Received: N95,000
    Assuming 5% VAT (N5,000) and 5% WHT (N5,000) were deducted.

    So for the sake of clarity of monthly VAT filing:

    Do I NOT file my VAT on that transaction for the month and expect a tax credit note of 5% WHT (for the N5,000) which I pay and then apply to my income tax. Should I also expect that the 5% VAT which was also deducted will be paid by the company I supplied to?

    OR

    Do I GO AHEAD and pay/file my 5% monthly VAT as usual and expect a tax 10% credit note from the company I supply to, which I then pay and apply to my income tax.

    Your prompt feedback is highly appreciated. Thank you.

  34. what is the best way to submit a quotation to a company for supplies so that the acutal gain to be made from the transaction is not lost in the business. assuming i am to supply to a govt agency goods and services worth 100,000. my gain in that deal is just N10,000. after i sent d bill with 5% vat, the total will be 105,000 but the company paid 95,000 thereby reducing my gain downwards. how best is to do such deal to retain my 10,000 gain.

  35. Why should I pay tax, when the government is so irresponsible, living large with taxpayers money, while we suffer zero infrastructure? Just tell me why I should?

  37. Pls, as an entity who pays her tax to state tax company like Lagos state inland revenue services, are we going to pay withholding tax to firs

  41. Can we have applicable tax law section and subsection supporting computations made as example please?

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