Most small business owners are usually 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:
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 you may need to employ the services of a tax consultant.