A-Z Of Withholding Tax In Nigeria – Beginners Guide For Small Businesses


 

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).

 

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 by 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 and an aggregate of all your WHT credit note is N200,000, the net tax you will pay to the government will be N300,000. That is why it is important to keep your WHT Note.

 

Pls More on the WHT Note? Ok, 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

1. Credit Number

2. The name of the tax payer (purchaser of your services or goods) who deducted the tax and remitted on your behalf

3. The name of the beneficiary whose invoice was deducted (which is you I suppose)

4. 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 even fails to deduct as well. Fortunately though, the tax authority can exercise leniency and grant the default some reprieve against the penalty.

 

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.

 

Pls 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

 

So What are the rates – The table below will help

WHT TAX

Thank You!!

Pls don’t forget to always consult a tax consultant for help with your taxes. This only serves as a guide.

 

What others say about : A-Z Of Withholding Tax In Nigeria – Beginners Guide For Small Businesses..


Heather

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

zoefafa

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.

Anonymous

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

Teingo Inko-Tariah

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

Sandra

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.

Nairametrics

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

Sullivan

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.

Dennis

Since the invoice is vat inclusive, then your employer was right by deducting WHT from the invoice.

Sullivan

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.

Oby

Does a company in a particular state pay WHT on supplies of raw materials to the state Government where it resides.

Oby

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

Nairametrics

Companies pay WHT to the FG not state. Only Sole traders or One Man businesses or Partnerships pay to the state

Agie

who can the lagos internal revenue service collect WHT from? can it be collected from a limited liability company?

Emmanuel Uwaga

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?

jamiu

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

Anonymous

WHT rate should be applied on the net amount. Applying it on the gross will amount to charging WHT on VAT.

Gideon

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?

Anonymous

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?

Irene

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?

Chika

This has to be an all time classic! Thank you nairametrics for helping small businesses everywhere!

Dare

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

Nairametrics

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

Immanuel Silas

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.

Philip

Please if am paying withholding tax, should I pay for the tax that is called for by a local government council?

Olumide Olumorokun

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

chima frank

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.

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