During the inauguration ceremony of the new Federal Inland Revenue Service (FIRS) Board, yesterday, 16 January 2020, the Honourable minister for Finance, Budget and National Planning, Mrs Zainab Ahmed, announced that the effective date for the implementation of the new Value Added Tax (VAT) rate would be 1 February 2020.
According to the Minister, this is to allow some time for the necessary administrative procedures, including the formal gazette of the Finance Act by the Federal Ministry of Justice, to be completed.
While this announcement is somewhat comforting, a public proclamation is not the law, therefore controversies still subsist until a legal document is issued in this regard. Further, other provisions of the Finance Act (not just the VAT rate implementation) also require a clear and legal commencement date.
While we await the resolution of the issue of commencement date, we would advise taxpayers to tidy up their internal processes in readiness for implementation of the newly amended laws.
We share a few tips on what your business can do to adjust to the change in VAT rate:
- Change the VAT settings in your accounting software/ system (or your invoicing platform) to either 7.5% or exempt (in the case of businesses making annual turnover of less than N25 million, or businesses selling exempt goods and/or services – see footnote for further explanations on this).
- Review the goods and services you sell – see what, among what you sell, is now VAT exempt or not.
- Adjust your annual budget to accommodate the increase in VAT rate. Remember subtle areas of cost increases due to the VAT rate increase e.g. bank charges.
- See if your company can change preference to purchasing goods and services from small businesses.
- For services rendered to non-resident companies outside Nigeria, the Act has made it clear that this service is exempt from VAT, whether rendered inside or outside Nigeria, as long as this service is NOT rendered to the Fixed Base or Permanent Establishment of the non-resident company you are dealing with.
- If you have un-recouped input tax or tax credit, and your business’ turnover is below the N25million threshold, you can still recoup your VAT by charging VAT and filing VAT returns (credit value) until your excess taxes are fully recouped. You can stop charging VAT/ filing VAT once you recoup your excess input taxes.
- Even though the Finance Act exempts your business from the penalties of registering for, charging and remitting VAT, nothing in the new Act says a business below the N25million threshold should not register for, charge or file VAT.
- Please note that the N25million turnover threshold would favour ‘service’ businesses more, as trading businesses would have significantly higher turnover due to inventory in trade.
- Notify non-resident companies which have a ‘subsisting’ (or continuing) contract to supply you goods and/or services that they need to register for tax in Nigeria using your business address. They also need to include VAT at 7.5% on the invoices they send to you; and you are to remit the VAT portion of the payment you make to them to their tax offices of registration here in Nigeria. Where they fail to include VAT one their invoices, the burden of self-accounting and remittance of such VAT still lies on you, the Nigerian recipient of the goods and/ or service they supply.
- In relation to the above, if your non-resident suppliers are freelancers or individuals, the provision above should not be enforced on your business as the law specifically refers to, “Non-resident Companies’ and not non-resident ‘persons’. If your business’ turnover is below the N25million threshold, the provision above will not apply or be enforced on your business.
- If your business has an annual turnover of less than N25 million (or less than N100 million, for Companies Income Tax purposes), you would require properly kept books of accounting records to prove it, in case of a tax query. You can keep your books by yourself, if you have a good, easy-to-navigate, small business accounting software [our firm (Vi-M) can assist you set up one].
The issue of ‘exempt’ versus ‘zero rated’ for small businesses is actually a precarious and confusing situation, particularly for businesses that deal in goods. Why?
- Exemption status, according to the VAT Act, means you neither pay input VAT nor charge Output VAT on the particular good/ service.
- Zero rate (0%) status means you will pay VAT on your purchase of goods meant for resale but will only charge VAT at 0% to your customers.
The difference: you can claim input VAT (VAT paid at the point of purchases of goods for resale) for no.2 above only.
The Problem with the Finance Act
Problem 1: It does not exempt you (as a small business) from paying VAT on your purchases of goods meant for resale, neither does it say you cannot file VAT returns. So, if you pay VAT on goods purchased for resale, and you do not charge back the VAT to customers, how do you recoup your money?
Problem 2: You might be forced to sell at a higher price to make a gain, considering the increased cost of purchases due to the VAT paid at the point of purchase, unless you decide to buy from a fellow small business that will not charge you VAT.
Problem 3: You might also be forced to ‘keep’ charging VAT on your sales, so that you can recoup your input VAT paid at the point of purchases. In this case, the small business is back to square 1 before the Finance Act.
Problem 4: the Finance Act says that if your input VAT exceeds your output VAT (which in this case is nil, so the input VAT is bound to exceed by at least 7.5%), you can claim your input VAT by deducting it from your output VAT when you file VAT returns in subsequent months. There will be no output VAT unless you charge VAT, and there would be no ‘deduction in subsequent months’ unless you file returns.
Problem 5: The Finance Act provides one alternative to claiming the excess input tax – that is, applying for refund from the FIRS. But it does not specifically refer to small businesses that do not charge VAT, so only God can tell the outcome of this.