Value Added Tax (VAT) in Nigeria: A Complete Compliance and Filing Guide

Value Added Tax (VAT) in Nigeria: A Compliance and Filing Guide

Comprehension of the Value Added Tax regime is a fundamental requirement for Nigerian businesses. The Nigerian Value Added Tax system, as governed by the Federal Inland Revenue Service (FIRS) under the VAT Act and as amended by the Finance Act, 2020, imposes a general rate of consumption tax on goods and services. Being in a position to know who, what, and how with regard to compliance is vital in an attempt to avoid massive penalties and enjoy being compliant with the tax authority. This exhaustive manual provides a definitive explanation of Nigeria's VAT regime, ranging from the current rate, registration, filing procedure, and the new legislative reforms every business must know.

Recent Amendments

The last major VAT adjustment in Nigeria was done by the Finance Act, 2020, effective from 1 February 2020.

1. VAT Rate Increase: VAT rate was increased from 5% to 7.5%
2. Clarifications for non-resident firms: The Act also made clarifications on the taxation of non-resident firms (NRCs) providing digital services to Nigerian consumers. NRCs are required to register for VAT with the FIRS and charge VAT on sales to the customer and remit it.
3. FIRS Increased Powers: The FIRS was given increased powers to tax and collect.

Scope & Applicability

VAT is a consumption tax levied on the value added to goods and services at each stage of the production and distribution chain. It is ultimately borne by the final consumer.

1. Goods and Services: VAT applies to all goods and services sold within Nigeria, with a specific list of exempt items (see below).
2. Imports: VAT is payable on goods brought into Nigeria under the control of the Nigeria Customs Service in partnership with the FIRS.
3. Exports: Exportable goods and services are zero-rated, i.e., no VAT is chargeable, and input VAT is recoverable.
4. Taxable Person: A "taxable person" is any individual, company, or government department that produces VATable goods and services in the normal course of trade. A firm with a turnover of ₦25 million or over is required to register.

VAT Rates and Calculation

Nigeria operates with a multi-tiered VAT rate system.

Standard Rate: 7.5%. This applies to all goods and services not explicitly classified as exempt or zero-rated.

Zero Rate (0%): Applies to:

• Non-oil exports.
• Goods and services supplied to enterprises in an Export Processing Zone (EPZ).
• Goods purchased by diplomatic missions (in some cases, subject to approval)

Exempt Supplies: These are items and services on which VAT is not levied, and for which the supplier cannot reclaim input VAT on connected expenses. Principal examples are:

• All drugs and medicines.  
• Basic foods (e.g., yam, corn, rice, milk).  
• Books and materials for study.  
• Baby products.  
• Services of Microfinance Banks.  
• Public transportation.

Compliance Process & Requirements

VAT compliance cycle is a continuous process that occurs monthly by registered companies.

1. Registration: The companies with a turnover of ₦25 million and above shall register with the FIRS in order to get a VAT registration number. It is done online via the FIRS TaxPro-Max platform. Failure to register incurs penalties.
2. Invoicing and Charging VAT: Registered firms are required to issue invoices for each taxable supply of VAT. The invoice must clearly state the amount of VAT charged as well as the price of the goods or services.
3. Accounting for VAT: Businesses are merely the government's agents for collection.
4. Output VAT: This is the 7.5% VAT charged to customers on sales.
5. Input VAT: This is the VAT incurred by suppliers on the supply of goods or services during business acquisition.
6. VAT return filing: A VAT-registered business entity must file a VAT return on a monthly basis. Although there are no business operations within a VAT reporting period, the business entity must file a VAT return, known as a nil return.
7. Remittance of VAT: The difference in the Output VAT - Input VAT shall be remitted to the FIRS. If the Input VAT exceeds the Output VAT, the balance can be carried forward and offset against liabilities for the following month. Cash refunds of Input VAT are very rare and can only be done in accordance with the strict rules.

Deadlines & Timeframes

It is vital to adhere strictly to deadlines, as no opportunities for relief from penalties will be granted without them.

• Tax Period: The VAT accounting period is the calendar month
• Return Filing and Payment Deadline: A VAT return and payment for a month must be filed by the 21st of the following month. For example, the submission deadline for January's VAT is the 21st of February.

Penalties for non-compliance

The FIRS enforces compliance through a regime of automatic penalties. The purpose of these penalties is to ensure the timely remittance of collected tax to the government.

Penalties	Details
Late Filing	A penalty of ₦50,000 for the first month of default, and ₦25,000 for each subsequent month the failure continues.
Late Payment	A penalty of 10% of the tax due plus interest at the prevailing Central Bank of Nigeria (CBN) Monetary Policy Rate.
Failure to Register	Penalties apply for failure to register for VAT upon meeting the threshold.
Issuing Invalid Invoices	Fines can be levied for failure to issue VAT invoices or for issuing invalid invoices.

Conclusion

In conclusion, Nigeria's VAT system is an organized, consumption tax base, and is an important revenue-generating tax for government expenditure purposes. The VAT in Nigeria has a standard rate of 7.5. It is registered to businesses, where the business has a taxable turnover of ₦25 million and over, and there are mandatory monthly obligations to file and pay, which are non-negotiable. The VAT is intended to collect money for public expenditure. The reason for significant penalties for not filing or paying on time is to ensure compliance with a revenue-generating tax and protect that stream of money. The most significant benefit for compliant businesses is the ability to recover input VAT, which allows them to avoid a cascading tax effect, therefore lowering the overall cost of doing business. Understanding the difference between exempt and zero-rated supplies, and the reverse charge for imported services, is no small feat and requires diligence and expertise.

FAQs

1. Do I need to register my business for VAT?

Your business has to register for VAT if the turnover of your business per year is ₦25 million or more. If your turnover is below this, you may or may not register. Monitor your turnover closely.

2. What do I do about VAT on services imported into Nigeria from outside Nigeria?

If your business purchases services from a foreign business (e.g., software subscription, digital marketing, consultancy services), you must self-tax VAT on such a service in the "Reverse Charge Mechanism." You are to tax this VAT in your return as output VAT and input VAT, thus having a net impact of zero, but placing the tax into the Nigerian system.

3. Can I obtain a refund if my output VAT is less than my input VAT?

Excess input VAT is usually carried forward to be used to offset future VAT charges. A cash refund is not straightforward and typically only available in respect of zero-rated supplies or in exceptional cases with the consent of the FIRS, following a rigorous audit procedure.

4. How is zero-rated supply different from exempt supply?

This is an important distinction. Zero-rated means the supply is taxable at a rate of zero%. You do not charge your customer VAT, but you recover the VAT you paid on associated costs in full. Exempt means the supply is not taxable. You do not charge VAT, but you do not recover any VAT paid on the associated costs, which become a business expense.

5. What types of records should I maintain for VAT accounting purposes? 

Legally, you are required to keep all records relating to your business transactions for at least six (6) years.  This would include VAT invoices, receipts, import papers, credit notes, debit notes, and your standard accounting records.

You can explore Flick's other global tax and compliance resources here.