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We have been inundated with messages from some of our readers who are confused about the application of Value Added Tax and Withholding Tax when paying for invoices provided by vendors.
Don’t be hard on yourself if you do not understand; most accountants also find it hard to figure these things out. Tax can be quite confusing, which is why as a small business owner, you should always have a tax consultant by your side.
To explain better we will use a scenario:
Jideowo Ltd is a supplier of printing materials and stationery that got a contract to supply stationery to MoMoney Ltd for an invoice value of N100,000. Being Vatable items, Jideowo Ltd adds a 5% VAT to the contract sum, bringing the total amount to N105,000. The invoice looks like this:
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What withholding Tax to deduct
Upon receiving this invoice, the accounts department of MoMoney will deduct 5% WHT from it and schedule a payment of N100,000 in favor of Jideowo Ltd. The deducted N5,000 is then remitted to the Federal Inland Revenue Service which issues a withholding tax credit note that should be given to authorized representatives of Jideowo Ltd.
VAT to Remit
Upon receiving the payment of N100,000 and tax credit note of N5,000, Jideowo Ltd will remit a sum of N5,000 to the Federal Inland Revenue as value added tax on the transaction. The FIRS will be shown the WHT credit note of N5,000 which can be used to set-off future company income taxes.
Break-down of payment (who gets what in cash):
Invoice amount – N105,000.00
FIRS (VAT) – N5,000.00
FIRS (WHT) – N5,000.00
Jideowo Limited – N95,000.00
Hope we have been able to clarify this issue adequately. If you still need further explanation, hit the comment section and a member of our team will be ready to respond.
This article was first published on Nairametrics on August 26, 2016.
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Thanks for your explanation. I have got a question about the withholding tax, why does MoMoney deduct withholding tax and give Jideowo Ltd a WTC note.
MoMoney does that because the law authorizes them to do so. It is a statutory requirement. If MoMoney does not deduct the tax then they will have to bear the cost and pay it themselves.
I think its proof that WHT has been remitted to the Tax authorities
Not sure I agree fully with it. My understanding is that where Momoney is a VAT agent, they will pay 95k, after deducting VAT and WHT of 5k each. The WHT credit note to be received by Jideowo will then be for 5k. Where Momoney isn’t a VAT agent, then they will pay Jideowo 100. It is there responsibility of Jideowo to remit the 5 of VAT.
Hi so what happens to the other 5000 after momoney pays 95000 and receive credit note for 5000 WHT.
Ultimately, it boils down to the tax rate applicable to the transaction carried out
Momoney cannot not remit VAT on behalf of Jideowo as Jideowo retains the right to remit its VAT. organisations remit VAT after netting off allowable input VAT which Momoney would deprive Jideowo of if it remit on Jideowo’s behalf. on WHT this is dependent on the Rate applicable and how the Invoice is structured. in the case above, Jideowo is a limited liability company and would be liable to a 10% WHT deducted by Momoney as explained by Nairametrics.
Correct @Olayemi.However, if MoMoney was an upstream oil company then they are allowed by law to deduct the VAT and remit.
Thanks @nairametrics for the clarification. Companies operating in the oil and gas industry are designated as VAT agents and have an obligation to deduct VAT. I hope it’s clearer now Olayemi
thank you Tunde, it is clearer. tax laws can actually be ambiguous sometimes and capable of different interpretations.
@olayemi its not a 10% withholding tax flat rate because Jideowo is a Ltd; as WHT rates are in different bands for different types of services or contracts. You can check the tax data card in the link below for further clarification. Cheers
https://www.pwc.com/ng/en/assets/pdf/2015-tax-data-card-nigeria.pdf
why is the WHT N10000, is it 10 or 5%?
We just used 10% as an illustration. It’s actually 5% for contract of supply. Thanks for noticing
https://guardian.ng/features/frequently-asked-questions-and-answers-on-withholding-tax/
well, I think otherwise. you are suppose to apply 5% on the amount. which invariably translate to the VAT charge. so what will be the withholding is 5000. which will be deduct by the company, the company then pays 100,000 to the supplier.
Good day, how will Jideowo record these transactions in his account?
TOP OF THE DAY, DO YOU CHARGE VAT AND WHT ON CASH TRANSACTIONS
Thanks Nairametrics for the breakdown.
However, I want to know how Jideowo would post this transactions in light of the following scenerios:
1. If Momoney is an oil company that is statutorily required to deduct both WHT and VAT and remit on Jideowo’s behalf.
2.If Momoney is just any other company that deducts just witholding tax and leaves Jideowo to remit its VAT i.e pays Jideowo #100,000 and gives him a WHT credit note of #5000.
3. If Momoney pays Jideowo the whole #105,000 so he can remit both WHT and VAT himself.
How do I post this please. I need urgent response. Thanks.
For both WHT and VAT
I don’t know what to do pls. Am working with a company CNPC as one of there contract staff which at d end of d month they will prepare a voucher that shows analysis of d payment. Under d voucher , there always a column of WHT of about 20,567. But till now , I v not seen my withhold tax credit note till now.. Over 1 year..
What do I do ?
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