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.