Navigating Nigerian Tax Compliance: VAT, Valuation, and the Life Cycle of a Business

Navigating Nigerian Tax Compliance: VAT, Valuation, and the Life Cycle of a Business

Bahas Books provides an in-depth analysis of critical aspects of Nigerian taxation, focusing on Value Added Tax (VAT) compliance requirements, the specific rules for determining the time and value of taxable supplies, and the assessment structure for companies during the crucial phases of business commencement and cessation. Understanding these regulations is key to maintaining fiscal health and regulatory integrity in Nigeria.

Part I: Value Added Tax (VAT) Concepts and Compliance

Value Added Tax (VAT) is a consumption tax that necessitates strict compliance from taxable persons regarding charging, collection, and documentation.

VAT Charging, Collection, and Non-Resident Obligations

The core responsibility for charging and collecting VAT falls upon all taxable persons engaged in taxable supplies, with the explicit exception of small businesses. VAT collection can be executed through three primary methods: during the supply of taxable goods; by being withheld at source by an appointed tax authority representative; or through a self-account system.

The computation of VAT involves two fundamental types: Input VAT, which is applicable on goods, services, or other fixed assets purchased, and Output VAT, which is the VAT charged on taxable supplies made. The amount of tax owed, the VAT Payable, is calculated as VAT Output minus VAT Input. Conversely, VAT Credit represents the excess VAT a company is liable to claim.

The rules for non-resident persons making taxable supplies to Nigeria are clearly defined for compliance: a non-resident person who makes taxable supplies to Nigeria should register for tax and charge VAT. If a non-resident person is making taxable supplies from outside the country, the taxable person who received the supply should withhold the VAT and remit it to the tax authority. Furthermore, a non-resident person who makes taxable supplies in Nigeria may appoint a representative for the purpose of VAT compliance.

Time and Valuation of Taxable Supplies

Determining the Time of Supply is crucial for accurate VAT remittance. For goods sold on credit, supply is deemed to take place at the time the taxable supply is delivered or payment is received by the supplier in respect of the supply, whichever comes first.

Specific rules apply to ongoing or segmented supplies:

  • For rental or periodic supplies (where services are used and paid for periodically), supply is deemed to take place for each period when payment is due or received by the supplier, whichever is earlier.

  • For agreements involving periodic payments or installments, VAT is charged once payment is due, received, or an invoice is issued, whichever comes first. This rule also applies to payments for a project made in relation to its progressive nature.

Special rules govern supply between connected persons where invoices are not issued:

  • For goods to be removed to the recipient, the time of supply is at the point of removing the goods.

  • If goods are not to be removed, the time of supply is once they are available to the recipient.

  • In terms of service, the time of supply is upon commencement.

  • For incorporeal supplies, it is when the supply becomes available for the use of the recipient.

The Value of Taxable Supplies for money consideration is defined as the Price plus VAT, meaning VAT will be charged on the price of the goods. The rules also acknowledge that the valuation of taxable supplies must address non-money consideration.

VAT Invoice Requirements

A taxable person who makes a taxable supply shall maintain a sequential invoice numbering system. A VAT Invoice shall be issued on supply whether or not payment is made at the time of supply. The VAT invoice must contain the following specific information: supplier's tax ID; an invoice number; name and address of the supplier; supplier's incorporation or business registration number as applicable; the date of supply; name of purchaser or client; gross amount of transaction; and VAT charged and the rate.

Part II: Commencement and Cessation of Business Assessment

This section details the rules for determining the assessable profits for companies during the initial phase of operation and upon the permanent termination of the business.

Commencement of Business Assessment

The determination of assessable profits for the first three years of a business's operation follows a specific structure:

  • First year (of assessment): The period runs from the commencement to the end of the first Accounting period.

  • Second year (of assessment): The period runs from the first day after the first accounting period to the end of the second accounting period.

  • Third year (of assessment): The period runs from the day after the last accounting period ended to the Accounting year ended.

Cessation of Business

When a trade, business, profession, or vocation permanently ceases to carry on operations in Nigeria in an accounting period, the assessable profits for the relevant year of assessment shall be the amount of the profits from the beginning of the accounting period to the date of cessation. Importantly, the tax due on this amount shall be payable within six months from the date of cessation. Additionally, if a taxable person changes the date to which it usually computes its assessable profits, the basis period for the computation of the assessable profits for the relevant year of assessment shall be the period commencing from the first day after the basis period of the immediately preceding year of assessment up to the new date on which the account was made, and the assessable profits of subsequent years of assessments shall be computed on the basis of the new accounting period.

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