What value added tax (vat) means
VAT is a tax on consumption, collected by businesses on behalf of the government.
A registered business adds VAT to what it charges, collects it from the customer, and remits it to the Federal Inland Revenue Service. The business is a collection agent rather than the taxpayer in economic terms.
That is why VAT should never be treated as revenue. Money collected as VAT belongs to the FIRS, and spending it because it is sitting in the account is how small businesses end up with liabilities they cannot meet.
How it is used
A registered business charges VAT on its taxable supplies, which is called output VAT. It also pays VAT on things it buys, which is input VAT. Broadly, it remits the difference and files returns on the required cycle.
Invoices must show VAT separately so customers can account for it correctly. An invoice showing only a lump sum causes problems for the customer's finance team and delays payment.
Key features
- A consumption tax charged on most goods and services
- Collected by the supplier and remitted to the FIRS
- Output VAT is charged on sales, input VAT is paid on purchases
- Registration is required once turnover crosses the applicable threshold
- Some supplies are exempt or zero rated, including certain basic items
- Must be shown separately on invoices
How this works in Nigeria
The VAT rate in Nigeria is seven and a half percent, raised from five percent under the Finance Act 2019.
Registration and filing obligations are administered by the FIRS, and there is a turnover threshold below which small businesses are relieved of the obligation to charge and remit. Nigerian tax law has moved repeatedly in recent years on thresholds and small business relief, so a business near the line should check the current position rather than rely on what was true two years ago.
The practical failure is cash flow. Businesses collect VAT, spend it, and then face a remittance they cannot fund. Keeping VAT in a separate account is unglamorous and it prevents a specific and avoidable disaster.
VAT vs withholding tax
VAT is added to your invoice. The customer pays more than your fee, and you remit the extra.
Withholding tax is deducted from your invoice. You receive less than your fee, and the deducted amount goes to the tax authority as an advance against your own tax.
Both can appear on a single invoice, which is why a supplier can invoice one hundred thousand naira, add VAT, have withholding tax deducted, and receive an amount that looks like neither figure. Understanding the arithmetic prevents a lot of unnecessary arguments with clients.
Limits and risks
VAT is not a tax on profit. A business making a loss still charges, collects and remits VAT, because it is a tax on the transaction rather than on the outcome.
Input VAT recovery is also not unlimited. Nigerian rules restrict what can be recovered, and businesses that assume every naira of VAT paid is recoverable are frequently wrong.
Worth knowing
Keep VAT you collect in a separate account. It is not your money, and spending it is the most common way otherwise healthy small businesses create a tax liability they cannot clear.
Questions people ask
What is the VAT rate in Nigeria?
Seven and a half percent, increased from five percent by the Finance Act 2019. It applies to most goods and services, with some supplies exempt or zero rated.
Do I have to register for VAT?
Registration and charging obligations depend on your turnover against the applicable threshold, administered by the FIRS. Small businesses below the threshold have been given relief, and the rules have changed more than once recently, so confirm the current position for your turnover.
What is the difference between input and output VAT?
Output VAT is what you charge customers on your sales. Input VAT is what you pay suppliers on your purchases. Broadly you remit the difference, subject to the restrictions on what input VAT can be recovered.
Is VAT the same as withholding tax?
No. VAT is added on top of your fee and paid by the customer. Withholding tax is deducted from your fee and remitted on your behalf as an advance against your own tax. They can both appear on the same invoice.
Should VAT appear separately on an invoice?
Yes. Showing it separately lets your customer account for it properly. Invoices with a single lump figure regularly get sent back, which delays payment.
What happens if I do not remit VAT I collected?
It becomes a liability with penalties and interest, and the FIRS can pursue it. The money was never the business's to spend, which is why keeping it separate matters.