What you need to know about VAT and Withholding Tax as a business owner

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I would hope we have had a good ride so far as regards this all-important issue of tax awareness and compliance as it affects Micro, Small and Medium sized businesses.

You may want to check my previous articles on Why the Tax Man does not want you to be compliant and Assumptions that may land you in trouble with the tax authority

For a brief moment, I am going to skip the plenty stories and address a misunderstanding about tax that many business owners have and which features in their day-to-day operations.

Let us talk about two kinds of transactional taxes that business owners are required to account for, almost in every deal with their clients, customers and other counterparties- Value Added Tax (VAT) and Withholding Tax (WHT).

My write-up today, is targeted at providing knowledge as to how these two taxes are totally unrelated to each other. These two guys (VAT & WHT) have given many business owners nightmares in my experience. This is primarily due to the fact that, at some point (before the introduction of the Finance Act 2019), the rates of both taxes was at 5% for the most part anyways.

I will start with VAT. This is a tax on consumption of goods and services. Let me break that down further. Let us say I sold a special package drug to a client and I invoiced the client to pay 100,000 Naira, the VAT regime says I have to also bill the client for VAT at 7.5% of the transaction amount. The client ends up paying me 100,000 + 7,500 = 107,500. The VAT amount of 7,500 is not my money – it is to be paid to the government as VAT charged on that particular transaction. In effect, the law in place makes me an agent of collection. As you can see, I have not “lost” a single kobo. All I did was to collect taxes (VAT) on behalf of the government.

Now,for the same transaction, if we assume that my said client is as tax compliant as I am, the law says he/she should withhold tax at the rate of 5%. This means that when my client wants to pay me, he will pay me 100,000(Fee) – 5,000(WHT) + 7,500(VAT) = 102,500. In effect, I have been paid 95% of my fees, helped the government to collect VAT and 5% of my fees has been deducted as income tax (WHT).

That brings me to WHT. This is not a tax in itself. WHT is an advance payment of income tax (tax on the annual profits of a company). The WHT regime was initiated to ensure that the government does not miss out on tax collection totally. If I had earned 5 million Naira at the completion of the transaction, I could pack my load and run off to Canada and the government will lose the entirety of the tax due on my fees. But the WHT taken from my fees, before it gets to me would already be sitting in the purse of the government even if I abscond.

We obviously cannot do justice to this topic at a go, I think I will provide more insights into these peculiarities in subsequent notes. Please have it at the back of your minds that VAT and WHT are not, in any way, related, not in their existence, not in their substance, not in the person bearing the tax, not in the person acting as the government agent for the collection and remittance and certainly not in their impacts in the books of a business.

Akinjide Akande B. Eng. ACA, ACTI is a seasoned tax professional with over 12 years of experience in Tax Compliance, Advisory, Accounting and Automation. He started his career with one of the top 4 accounting firms before proceeding to a leading Tax professional services firm where he gathered knowledge and hands-on experience in Nigerian taxes in the areas of accounting, advisory, compliance, automation, dispute resolution and adjudication. He has served as a tax consultant in various industries including the financial services, manufacturing, IT and FMCG sectors. He has a good grasp of the relevant tax statutes and the practice of tax in Nigeria. He currently works as the tax manager for a leading bank in Nigeria.He can be contacted via email : akinjidayakanday@gmail.com

 

 

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