Q&A: The Ultimate Guide to VAT Compliance for Small Businesses in Nigeria

Q: How Can Small Businesses Handle VAT Compliance Properly in Nigeria?

A: Value Added Tax (VAT) compliance is one of the biggest tax challenges for small and medium-sized enterprises (SMEs) in Nigeria. Many business owners either ignore it, apply it incorrectly, or fail to remit it on time, leading to hefty penalties from the Federal Inland Revenue Service (FIRS). In this article, we’ll break down VAT compliance in simple terms and show you how to handle it properly.

What is VAT?

VAT is a consumption tax charged at 7.5% on the supply of taxable goods and services in Nigeria. The tax is paid by the final consumer, but businesses act as collection agents for the government by charging VAT and remitting it to the FIRS.

Who Should Register for VAT?

Every business with an annual turnover of ₦25 million or more is required to register for VAT with the FIRS. However, even if your business earns less than ₦25 million, registering voluntarily can still be beneficial, especially if you deal with VAT-registered companies that require you to charge VAT on invoices.

Steps to Handle VAT Compliance Correctly

1. Register for VAT on Time

Once your business reaches the ₦25 million threshold, you must register for VAT within six months. Delayed registration can attract penalties, so it’s best to do it early. You can register online via the FIRS portal or visit a tax office near you.

2. Charge VAT Correctly

When issuing invoices for taxable goods or services, include 7.5% VAT separately. Your invoice should clearly state the VAT amount so your clients know they are being charged correctly.

3. File Monthly VAT Returns

VAT returns must be filed monthly, even if you didn’t make any taxable sales that month. The deadline for filing and remitting VAT is the 21st of the following month. Late filing attracts penalties of ₦50,000 for the first month and ₦25,000 for each subsequent month of default.

4. Keep Proper Records

Maintain proper documentation of VAT transactions, including invoices, receipts, and returns filed. This will help in case of an audit and ensure that you’re remitting the correct amount.

5. Claim Input VAT Where Applicable

Businesses can deduct the VAT they pay on purchases (input VAT) from the VAT they collect on sales (output VAT). However, this applies only if the input VAT is from business-related purchases and you have proper documentation to support the claim.

Common VAT Mistakes to Avoid

  • Not registering for VAT on time – This leads to penalties.
  • Failing to remit VAT collected – Using VAT funds for business expenses instead of remitting them is a serious offense.
  • Wrongly applying VAT exemptions – Some goods and services are VAT-exempt, but misclassifying taxable items can cause compliance issues.
  • Ignoring VAT filing even when there are no sales – You must file NIL returns to avoid penalties.

Final Thoughts

Handling VAT properly ensures that your business stays compliant and avoids unnecessary penalties. If you’re unsure about any part of VAT compliance, consider working with a tax expert to guide you.

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