Whether you are opting out of a paid job to run your own business, or you are entering into business with zero employment experience; one thing is certain: you are becoming an administrator and a business leader if you scale through. As such, it is required that you perform some managerial obligations in the best interest of your business.
This is to expertly prevent you suffering undue charges in the long run. One of such obligations is the issue of Withholding Tax that comes in various ways. Here is a comprehensive guide detailing all you need to know about Withholding Tax in Nigeria.
What is a Withholding Tax?
A withholding tax is basically an advance and indirect source of taxation deducted at source from the invoices of the tax payer. It’s main purpose is to capture as much tax payers that may have evaded tax into the tax net. Withholding tax rates are usually 10% or 5% depending on the type of transaction and collecting authority for the tax (which can be a Federal Inland Revenue or the State Inland Revenue).
[ALSO READ: A legal view of corporate taxation in Nigeria]
[ALSO READ: Taxes you need to be aware of if you are about to start a business]
How Does it work?
When a company or individual supplies goods or services to another company an invoice will usually be issued as evidence of a transaction. If for example the amount payable by the purchaser is N1million at the relevant tax rate is 10% then upon payment the purchaser will deduct N100,000 from the invoice of the supplier and then remit to the relevant tax authority.
The Purchaser is also obligated to obtain evidence of remittance in the form of a withholding tax credit note on behalf of the supplier. The Supplier can now use the tax credit not to reduce any income tax payable at the end of his year of assessment.
How do I use a WHT Note to reduce my income taxes?
WHT is an advance payment of your income tax, therefore if at the end of a financial year your tax payable is N500,000.00 and an aggregate of all your WHT credit note is N200,000.00, the net tax you will pay to the government will be N300,000.00. That is why it is important to keep your WHT Note.
[ALSO READ: A legal view of corporate taxation in Nigeria]
Please tell me more on the WHT Note
Okay, the WHT credit note is a document issued by a relevant tax authority to a beneficiary as evidence that withholding tax was deducted from its business. It is usually issued to the company that deducted the WHT from your invoice as such you must endeavour to always go back and request for it. This is because without it you will not be able to claim back the money that has been deducted from your invoice.
A WHT Credit note will include the following
- Credit Number
- The name of the tax payer (purchaser of your services or goods) who deducted the tax and remitted on your behalf
- The name of the beneficiary whose invoice was deducted (which is you I suppose)
- The Date of the transaction including the nature of the transaction
So what happens if my customer fails to remit my taxes on time?
Too bad, there is nothing much you can do except complain and then blacklist the customer. However, the tax authority upon noticing have penalties ranging from 200% per annum of tax not remitted for companies and N5,000 per annum for individuals. Meaning if your customer fails to remit N100k in withholding taxes already deducted from your invoice his penalty will be to pay N200k extra.
This penalty also applies to anybody who equally fails to deduct as well. Fortunately though, the tax authority can exercise leniency and grant the default some reprieve against the penalty.
[ALSO READ: Taxes you need to be aware of if you are about to start a business]
As the Remitter , when Do I have to remit the taxes I deduct?
So, if you deduct taxes from your suppliers invoice you must file returns at the end of any given month. All you do, is draw up a schedule detailing the list of companies you deducted taxes from, their addresses, the value of the invoices, the tax deducted and the rate, Your name and address as the tax payer and the relevant tax authority . You then attach a cheque(s) for the total amount deducted for the month.
You can pay directly to the bank. Banks these days have agent who collect these cheques on your behalf and promptly obtain receipt of payment on your behalf. After obtaining receipt of payments, you now take to the relevant tax authority attached to your schedule, so you can be handed the WHT credit notes on behalf of your clients. You should keep a file for all the WHT Credit note you receive on behalf of your clients for easy accessibility.
Does it mean all transactions involve WHT?
WHT is mainly for transaction involving contract of purchase. What this means is that WHT can only be deucted from your invoice if it involves supply of goods and services to a destination requested for by your client. WHT cannot be deducted in the ordinary course of your business, meaning if I you sell soaps and I come to your shop or market to buy the soap, I cannot deduct WHT from your receipt.
However, If I ask you to supply to me then that becomes a contract and as such I am obliged to deduct WHT from you.
[ALSO READ: A legal view of corporate taxation in Nigeria]
Please what do you really mean by Relevant Tax Authority?
A relevant tax authority is either the State or the Federal Government. The State Government collected WHT from Individuals or Sole Traders under the Personal Income Tax Act. The Federal Inland Revenue collects tax on behalf of the Federal Government under the Company Income Tax Act
CAVEAT: Don’t forget to always consult a tax consultant for help with your taxes. This only serves as a guide.
[ALSO READ: Taxes you need to be aware of if you are about to start a business]
Precisely what really motivated you to create “A-Z Of Withholding Tax In Nigeria – Beginners Guide For Small Businesses | UGOMETRICS BLOG”?
I personallycertainly adored the post! Thanks -Anita
thanks a lot ugometrics. stumbling upon the link that brought me to this site has been like striking a diamond mine of financial literacy. thanks a bunchy y’all.
Very educating…
I found this article on withholding tax very useful. I think that there is a high risk of double taxation with this category of tax. The other issue is the technicality involved in determining what constitutes ordinary course of business especially for service providers. I believe that if the other heads of taxes are well monitored and executed, there would be no need for withholding tax and the risk of double taxation for instance via WHT and VAT on the same service
I found this article on withholding tax very useful. I think that there is a high risk of double taxation with this category of tax. The other issue is the technicality involved in determining what constitutes ordinary course of business especially for service providers. I believe that if the other heads of taxes are well monitored and executed, there would be no need for withholding tax and the risk of double taxation for instance via WHT and VAT on the same service
Thanks for educating me in the field of Taxation.
Very educating. Thank u for the awareness on dis topic
Beautiful! Really helped
Please, I need clarification on something. My employer charged a supplier WHT on his invoice, and the selling price of the goods already has VAT included. So the supplier claims that since he has charged VAT on the transaction that there was no need to pay his fees net of WHT again.
Could you please provide explanation to clear this.
Hi Sandra, You charge 10% WHT (if it is a registered company) or 5% WHT (if its a sole trader) on his invoice.So for example, he sells you an item costing N100 and charges 5% VAT his invoice will be N105. However, before paying you deduct the WHT from the N100 and not N105. The tax base for WHT is on the supply value (excluding VAT) Cheers
Hi Nairametrics, the first sentence of your explanation is not quite correct. What determines the WHT tax rate is first of all the nature of the transaction and then the entity type. For example, a supply of a good or the provision of a service (contract of supply/service) will attract WHT at 5% irrespective of whether it is an incorporated entity (limited liability company, plc) or unincorporated entity (partnership, enterprises etc.
Since the invoice is vat inclusive, then your employer was right by deducting WHT from the invoice.
Nice
Thanks… This is really helpful
WTH has been clearly explained in your post. I really like the examples and the simple language used. Thank you a lot.
I meant WHT up there.
A good post…. We have setup Taxassit to provide free tax services to starters and SMEs in Lagos and Port Harcourt. All tax advices are provided by volunteers with experience from the big 4 accounting firms.
The website is under construction and the services are completely free.
Thanks for the good initiative I’m highly interested to participate you can reach me on Adetao2007@gmail.com thanks
Adekola Taofeek Aca
What’s the endpoint of the free service? If free indeed, then I am interested
Does a company in a particular state pay WHT on supplies of raw materials to the state Government where it resides.
Does a company in a particular state pay WHT on supplies of raw materials to the state Government where it resides and if not why
Companies pay WHT to the FG not state. Only Sole traders or One Man businesses or Partnerships pay to the state
Please can WHT be deducted in rents?
who can the lagos internal revenue service collect WHT from? can it be collected from a limited liability company?
Please what will be the right WHT treatment on invoice sent iro out sourced staff salaries with all statutory deductions to be remitted by the sourcing firm?
We believe it is 10%
10% of the total invoice or 10% of service charged?
This is quite rich and knowledge broadening. Kindly cite the relevant tax legislation and date for WHT legislation in Nigeria
Can WHT be deducted in retrospect?
Please how can WHT be deducted from rent?
For transactions that attract both vat and wht. I think the normal practice of deduction is to deduct vat first from the gross value and later apply appropriate wht rate on the net after vat. Some say no to this approach.they opined that the wht rate should be applied on the gross. Please which of these opinions is right
WHT rate should be applied on the net amount. Applying it on the gross will amount to charging WHT on VAT.
This article is wonderful. All thanks
How do you handle a situation where WHT was not deducted on previous payments on a contract which occurred in previous years? Can WHT of the previous payments be deducted by the Client from the outstanding balance in the preceding year?
Do you need to withold WHT if you have not paid the supplier?
Thanks for the post….
However, in a case of an unincorporated company (Enterprise), I understand it is not liable to pay Company Income Tax. The customers have been paying WHT on its behalf. How does an Enterprise claim back the deducted WHT from the government since it is not liable for CIT?
This post is brilliant. The language is simple and very comprehensible. Thank you so much for this insightful piece. Can you please provide the link to the Taxassist website you spoke about?
Is WHT applicable on foods supplied by a fast food outlet for a function?
Will appreciate your prompt response.
Yes it is
Thanks so much for this piece
The text is simplified and very interesting.
Thanks so much you have saved me the stress of going to FIRS for enquiry.
This has to be an all time classic! Thank you nairametrics for helping small businesses everywhere!
The write up on WHT is educative and insightful. Thank you
Good write-up, but quick question pls. Supposing I gave out an Invoice with contract value of N50,000 and VAT of N2,500. Total Invoice value comes to N52,500. The client paid N47,500 (which is a deduction of 10% WHT on the contract value). My question is since the client deducted withholding tax and gave me the WHT credit note, am I still supposed to remit the VAT of N2,500 to FIRS? Thinking it will be double taxation when I remit VAT of N2,500 again from my N47,500. please help out. Thanks
Hi…it will not be double taxation. You are still expected to remit the N2,500 as vat. You only remit less if you have a corresponding input vat
Let’s look at it this way:
Contract value 50000
VAT 2500
Total 52500
When payment is made.
Cheque 47500
Credit Note 5000
Total 52,500
Hence, when you remit VAT of N2500 from the cheque amount, You’ll still be left with your contract value of N50000 which is now made up of N45000 in bank and N5000 in form of WHT credit note.
Hi Dare,
If the WHT Credit Note issued to you is valued at N5,000, (as against N2,500 at 5% as expected), it then means a 10% rate was applied to your invoice. However, you still have to remit the VAT of N2,500.
Thank you
Thanks so much for the info. Is my school’s end of year party also liable to the WHT?
Please if am paying withholding tax, should I pay for the tax that is called for by a local government council?
Pls explain better. What local government tax are you referring to?
I appreciate your good work but I will enjoy updates on economic issues,
thanks,
Peju
The A-Z of Witholding tax in Nigeria depicts the best way of explanation of the concept of Witholding tax with clarity on the part of a lay-man. thank you
am in a supply firm, we have not been given WHT credit note from a particular company for some time now and the authority(government) have charged us to bring our note or to pay the bills. pls i want to know how to go through in getting all the WHT from that company we have been supplying to.
less grammar and jargons. Simply telling what it is anyone might be wanting to know. Thank you very much
How do I generate a schedule, please? Thanks.
If I am not the purchaser or supplier and WHT has been deducted from purchaser, would I still pay tax on my commission received from supplier?
If a supplier of service gave a certain % of discount to a purchaser, what value will be subjected to WHT? is it the gross or the net value?
Please how do you account for WHT tax (from service provider’s perspective)? I would like to know the accounting entries.
My tenant, an eatery pays one million as rent, is it right for the tenant to deduct 10% from my rent as WHT even when l am a retiree. Please, l really want to be educated on this. Divine
The eatery will deduct WHT from rent payment to you if the house is not owner-occupied.
Best description, simple and straight to the point! Thank you
Thank you for the info. Kindly advice on what to write to a client who deducts witholding tax on total invoice instead on admin charge. Thank you
Thank you for the information.
Thanks for this article, could you please let me know if WHT is applicable for transport services(air freight shipment from Europe to Lagos) invoiced by a foreign company
WHT can only be charged on transactions carried out within Nigeria. Foreign company’s will not have any means of accessing the credit notes.
This a wonderful piece of work, but my question is
1. What are the criteria to meet before a company can withhold tax on behalf of government, state or federal?
2. What should be the appropriate actions to take against a company who refused to issue tax credit note having dedicated withholding tax?
I strongly hope that these questions of mine are clear enough to deserve an answer. I have dropped my email address for subsequent post on tax related information or enlightenment as well as response to my questions.
Many thanks.
Thanks, the article is educating.
Good Article, please how much withholding tax is deducted from a retainership fee meant for a Law firm who offer legal services to a company?
Remember the Law firm is an enterprise not a company.
so we paid our agent the sum of 15m for rent and the contract stated that the amount was net of tax. so this means we will pay 10% of that amount to LIRS? kindly assist as i will appreciated your swift response.
If another country ( DRC Congo) deducts WHT for an export contract from Nigeria ..can the Nigerian co. use the WHT credit note to claim Tax offset
Can WHT be deducted on a landed property trasaction? Say I sell my house to a company at an agreed sum, does the company have any power to deduct any amount in the name of WHT?
What are the differences between vat and wht?
I relish, result in I found just what I used to be looking for.
You have ended my four day long hunt! God Bless you man. Have
a nice day. Bye
What can be done if my employer has been deducting my tax and pension from my salary every month and they refuse to remit it and it has been ongoing for 4 months?
Clear and direct. Many thanks. Thanks again.
Good evening and thanks for this explantion on WHT. Do you charge WHT on the total value on the invoice or the service charge of the supplier?
Good evening Nairametrics. If we hire contractors to do some construction or building repairs and related activities, at which amount will be the basis on computing withholding tax? For example, their invoice amount is N100,000, this already include 70,000 for materials and 30,000 for labour/workmanship. How would we treat this with regards to withholding Tax Computation? Thank you.
Thank you so much for your teaching.
My question is this,
If I have an enterprise company that pays her tax to the State government, and my Landlord is a limited liability company that pays tax to FIRS, will I still deduct withholding tax for the Internal Revenue Services?
Thanks
Can WHT be deducted from invoice amount to sole traders?
I think this question has been ignored severally. Is withholding tax charged on rent
i need more clarification on withholding tax payable to state and Federal Government
Nice one
Wow. I have learned alot from this