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:
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:
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.
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.
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.
Hi so what happens to the other 5000 after momoney pays 95000 and receive credit note for 5000 WHT.
Ultimately, it boils down to the tax rate applicable to the transaction carried out
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.
Correct @Olayemi.However, if MoMoney was an upstream oil company then they are allowed by law to deduct the VAT and remit.
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
thank you Tunde, it is clearer. tax laws can actually be ambiguous sometimes and capable of different interpretations.
@olayemi its not a 10% withholding tax flat rate because Jideowo is a Ltd; as WHT rates are in different bands for different types of services or contracts. You can check the tax data card in the link below for further clarification. Cheers
https://www.pwc.com/ng/en/assets/pdf/2015-tax-data-card-nigeria.pdf
why is the WHT N10000, is it 10 or 5%?
We just used 10% as an illustration. It’s actually 5% for contract of supply. Thanks for noticing
https://guardian.ng/features/frequently-asked-questions-and-answers-on-withholding-tax/
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.
Good day, how will Jideowo record these transactions in his account?
TOP OF THE DAY, DO YOU CHARGE VAT AND WHT ON CASH TRANSACTIONS
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.
For both WHT and VAT
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 ?
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.
Is WHT and VAT applicable on the interest expenses and interest income of banks deposits and loans & advances respectively?
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.
the comment above is with regards to services rendered to an oil company
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.
What is the due date of VAT payment
On or before 21st day of the following month.
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.
You deduct for the service of N100,000 . WHT is on the service amount not service plus VAT.
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.
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
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 ?
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
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
Yes you can.You net the VAT you paid from the VAT you collected and remit the difference to FIRS.
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
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.
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
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.
@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?
Pls if Jideowo Ltd gets N95,000. What percentage of Invoice bill would it be?
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.
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.
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?
Hello AZ, only oil companies are allowed to deduct both VAT and WHT from your invoice.
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.
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.
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?
Please some one should add me to an accounting group chart. please. my number is 07031279189
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
I need a clarification. if the invoice amount is N100,000 NET OF ALL TAXES, how much is VAT and how much is WHT?
Is it normal to charge VAT and WHT on same invoice. And if what kind of transaction can warrant doing this ?
Is WHT applicable to all services enjoyed by a company? E.g Cable subscriptions , electricity bills and other utilities
Can we have applicable tax law section and subsection supporting computations made as example please?
lemme take for instance, my company charges her VAT FROM SERVICE CHARGE generated in an invoice, bcos we believe that the items we supplied has been vatted from the importer so to say.
Is that ok?
Hi Susan, as long as you are selling the product again you to include or charge VAT for it.
My question is on WHT rate, i learnt that if a company has a contract of service or supply with a vendor , the company will deduct 5% wht on the vendor invoice but if it is like just one off supply or services ( which means no contractual agreement between the company and the Vendor) then you deduct 10% WHT on its invoice, how true is this?
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.
Thank you for the clarification.But what of companies that did not vat their invoice,can the paying company still deduct WHT regardless?
what if its educational materials that was purchased. how will the calculation be
Comment:we have a contractor who in his invoice brings a bill of #440,000 without stating vat, but in the course of raising payment voucher, the superior officer will direct that we should build 5% VAT to the #440,000 before deducting the 5%VAT from the new gross. pls I need clarification. Is it the right procedure.
Since N105,000 was what was invoice to MoMoney and in return MoMoney will deduct 5% WHT from it and schedule a payment of N100,000 in favour of Jideowo Ltd. The deducted N5,000 is then remitted to the Federal Inland Revenue Service.Also, Jideowo Ltd still go ahesd to pay 5% VAT, what will Jideowo Ltd write in the receipt for Momoney when she demand for her receipt?
In line with the new policy that effected from 1st February, 2020, how will the invoice be treated and what will be the responsibility of MoMoney to FIRS. please I need quick response. Thanks
Pls assist with solution to this situation. If a Gas Supplier supplies Gas to a manufacturing company. Upon payment period, should WHT be deducted from the invoice value or not?
Bearing in mind that, the Gas Supplier is claiming that he operates in the Petroleum Industry, and as such his payment should not be subjected to WHT deduction.
Love your explanations, thanks so much and God bless.
Hi Nairametrics, Please clarify if a business is expected to pay VAT on invoice or on actual receipts.
In other words am I liable to pay VAT on sales for which payment was not made?