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Whether you are opting out of a paid job to run your own business, or you are entering into business with zero employment experience; one thing is certain: you are becoming an administrator and a business leader if you scale through. As such, it is required that you perform some managerial obligations in the best interest of your business.
This is to expertly prevent you suffering undue charges in the long run. One of such obligations is the issue of Withholding Tax that comes in various ways. Here is a comprehensive guide detailing all you need to know about Withholding Tax in Nigeria.
What is a Withholding Tax?
A withholding tax is basically an advance and indirect source of taxation deducted at source from the invoices of the tax payer. It’s main purpose is to capture as much tax payers that may have evaded tax into the tax net. Withholding tax rates are usually 10% or 5% depending on the type of transaction and collecting authority for the tax (which can be a Federal Inland Revenue or the State Inland Revenue).
[ALSO READ: A legal view of corporate taxation in Nigeria]
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[ALSO READ: Taxes you need to be aware of if you are about to start a business]
How Does it work?
When a company or individual supplies goods or services to another company an invoice will usually be issued as evidence of a transaction. If for example the amount payable by the purchaser is N1million at the relevant tax rate is 10% then upon payment the purchaser will deduct N100,000 from the invoice of the supplier and then remit to the relevant tax authority.
The Purchaser is also obligated to obtain evidence of remittance in the form of a withholding tax credit note on behalf of the supplier. The Supplier can now use the tax credit not to reduce any income tax payable at the end of his year of assessment.
How do I use a WHT Note to reduce my income taxes?
WHT is an advance payment of your income tax, therefore if at the end of a financial year your tax payable is N500,000.00 and an aggregate of all your WHT credit note is N200,000.00, the net tax you will pay to the government will be N300,000.00. That is why it is important to keep your WHT Note.
[ALSO READ: A legal view of corporate taxation in Nigeria]
Please tell me more on the WHT Note
Okay, the WHT credit note is a document issued by a relevant tax authority to a beneficiary as evidence that withholding tax was deducted from its business. It is usually issued to the company that deducted the WHT from your invoice as such you must endeavour to always go back and request for it. This is because without it you will not be able to claim back the money that has been deducted from your invoice.
A WHT Credit note will include the following
- Credit Number
- The name of the tax payer (purchaser of your services or goods) who deducted the tax and remitted on your behalf
- The name of the beneficiary whose invoice was deducted (which is you I suppose)
- The Date of the transaction including the nature of the transaction
So what happens if my customer fails to remit my taxes on time?
Too bad, there is nothing much you can do except complain and then blacklist the customer. However, the tax authority upon noticing have penalties ranging from 200% per annum of tax not remitted for companies and N5,000 per annum for individuals. Meaning if your customer fails to remit N100k in withholding taxes already deducted from your invoice his penalty will be to pay N200k extra.
This penalty also applies to anybody who equally fails to deduct as well. Fortunately though, the tax authority can exercise leniency and grant the default some reprieve against the penalty.
[ALSO READ: Taxes you need to be aware of if you are about to start a business]
As the Remitter , when Do I have to remit the taxes I deduct?
So, if you deduct taxes from your suppliers invoice you must file returns at the end of any given month. All you do, is draw up a schedule detailing the list of companies you deducted taxes from, their addresses, the value of the invoices, the tax deducted and the rate, Your name and address as the tax payer and the relevant tax authority . You then attach a cheque(s) for the total amount deducted for the month.
You can pay directly to the bank. Banks these days have agent who collect these cheques on your behalf and promptly obtain receipt of payment on your behalf. After obtaining receipt of payments, you now take to the relevant tax authority attached to your schedule, so you can be handed the WHT credit notes on behalf of your clients. You should keep a file for all the WHT Credit note you receive on behalf of your clients for easy accessibility.
Does it mean all transactions involve WHT?
WHT is mainly for transaction involving contract of purchase. What this means is that WHT can only be deucted from your invoice if it involves supply of goods and services to a destination requested for by your client. WHT cannot be deducted in the ordinary course of your business, meaning if I you sell soaps and I come to your shop or market to buy the soap, I cannot deduct WHT from your receipt.
However, If I ask you to supply to me then that becomes a contract and as such I am obliged to deduct WHT from you.
[ALSO READ: A legal view of corporate taxation in Nigeria]
Please what do you really mean by Relevant Tax Authority?
A relevant tax authority is either the State or the Federal Government. The State Government collected WHT from Individuals or Sole Traders under the Personal Income Tax Act. The Federal Inland Revenue collects tax on behalf of the Federal Government under the Company Income Tax Act
CAVEAT: Don’t forget to always consult a tax consultant for help with your taxes. This only serves as a guide.
[ALSO READ: Taxes you need to be aware of if you are about to start a business]
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Precisely what really motivated you to create “A-Z Of Withholding Tax In Nigeria – Beginners Guide For Small Businesses | UGOMETRICS BLOG”?
I personallycertainly adored the post! Thanks -Anita
thanks a lot ugometrics. stumbling upon the link that brought me to this site has been like striking a diamond mine of financial literacy. thanks a bunchy y’all.
Very educating…
I found this article on withholding tax very useful. I think that there is a high risk of double taxation with this category of tax. The other issue is the technicality involved in determining what constitutes ordinary course of business especially for service providers. I believe that if the other heads of taxes are well monitored and executed, there would be no need for withholding tax and the risk of double taxation for instance via WHT and VAT on the same service
I found this article on withholding tax very useful. I think that there is a high risk of double taxation with this category of tax. The other issue is the technicality involved in determining what constitutes ordinary course of business especially for service providers. I believe that if the other heads of taxes are well monitored and executed, there would be no need for withholding tax and the risk of double taxation for instance via WHT and VAT on the same service
Thanks for educating me in the field of Taxation.
Very educating. Thank u for the awareness on dis topic
Beautiful! Really helped
Please, I need clarification on something. My employer charged a supplier WHT on his invoice, and the selling price of the goods already has VAT included. So the supplier claims that since he has charged VAT on the transaction that there was no need to pay his fees net of WHT again.
Could you please provide explanation to clear this.
Hi Sandra, You charge 10% WHT (if it is a registered company) or 5% WHT (if its a sole trader) on his invoice.So for example, he sells you an item costing N100 and charges 5% VAT his invoice will be N105. However, before paying you deduct the WHT from the N100 and not N105. The tax base for WHT is on the supply value (excluding VAT) Cheers
Hi Nairametrics, the first sentence of your explanation is not quite correct. What determines the WHT tax rate is first of all the nature of the transaction and then the entity type. For example, a supply of a good or the provision of a service (contract of supply/service) will attract WHT at 5% irrespective of whether it is an incorporated entity (limited liability company, plc) or unincorporated entity (partnership, enterprises etc.
Since the invoice is vat inclusive, then your employer was right by deducting WHT from the invoice.
Nice
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