In the course of my about a decade tax career, the experience has been that time and time again businesses suffer huge avoidable tax liabilities, especially as outcomes of tax audits, due to under remittance of transaction taxes; mostly Value Added Tax (VAT) and Withholding Tax (WHT). This issue cuts across industries and firms of different sizes as though none is immune to it.
Why, some may ask, do companies neglect this seemingly simple and basic fundamental of remitting transaction taxes more so because these taxes are ordinarily not a business' own tax obligation. Businesses simply act as agents of collection for the government.
Each time I see this scenario play out over and over again, it hurts me for two reasons:
- They are ordinarily not your tax liability and you end up taking it up and leaving the government with a tip (in the form of interest and penalties)
- They are manageable and avoidable even without the help of a tax expert
The concept of Value Added Tax (VAT) is simple enough, the burden of tax rests on the final consumer. As a registered taxpayer (whether a non-corporate or corporate entity), you are expected to charge VAT at 5% of the good/service you provide to the extent that your supplies are not exempt or zero rated.
Your client would pay the VAT alongside your charges for goods/services supplied. VAT collected is due for remittance on or before the 21st day of the month following the month of sale transaction (i.e. if sale was made in January, VAT is remitted on or before 21 February). The FIRS has set up an online portal for ease of filing of returns and payments can be made online as well.
Similarly, both the Companies Income Tax Act (applicable to corporates) and Personal Income Tax Act (applicable to non-corporates) provide that withholding tax (WHT) must be deducted at applicable rates from every payment made to a person or company. Exemptions would only apply where the beneficiary of such payment is tax exempt or the income is tax exempt. In the same vein, tax so deducted is remitted on or before 21st day of month following.
Once again, it is clear from the above that WHT is not your liability but that of the beneficiary of funds. Subsequently, the tax authority will issue a credit note for the beneficiary which is used to offset his final income tax liability when established.
From my interactions with business owners, there is a misconstrued idea that both taxes (VAT and WHT) are set off against each other and as such there is no outstanding tax obligation. They conclude that they are good to go on their tax payments.
This myth cannot be further from the truth. Please know this today, you cannot set off WHT against VAT or vice versa. These are two separate and independent taxes.
VAT ordinarily applies to sales/income (except where dealing with foreign companies and other variations when dealing with companies in the oil and gas sector)
- WHT applies to payments i.e. expenses
- VAT is a separate tax borne by the final consumer
- WHT is borne by the beneficiary of monies paid and is an advance income of tax available to offset your final income tax liability
- For non-corporates, both taxes are payable to different tax authorities; VAT to FIRS and WHT to relevant State Board of Internal Revenue
Failure to deduct and remit taxes expose businesses to additional tax liabilities which are hitherto avoidable if properly collected and accounted for. These can grow to significant amounts that negatively impacts the business' bottom-line and in extreme cases wipe out your entire profits. Non-compliance also makes your business less attractive to investors and create reputational issues. Here are a few tips you can apply going forward:
Deduct and remit taxes as and when due; this cannot be overemphasized
- Carry out monthly reconciliation of your income/expenses and attendant taxes i.e. add up all your sales and compute VAT at 5%. Compare outcome with your remittance and explain any variance identified. It could be that you have not fully accounted for taxes or income involved is exempt; make adjustments accordingly
- Repeat the same exercise for your expenses and compare with your WHT remittances. Be sure to cross check that you computed WHT at the correct rate as the rates range from 5%-10%
- Don't be afraid to seek clarification when in doubt, feel free to write to FIRS and you will get a response. Every taxpayer also has relationship managers and their numbers are published at various FIRS offices. Use them and stay close to them for clarification on how to treat contentious issues
- If your business can afford a tax consultant, request their expert tax advice
- Educate your customers on the need for your business to comply with tax laws. I am aware there are those who insist that tax should not be deducted from their payments. Where possible, find replacement vendors and refuse to do business with non-ethical customers. They leave you with the tax bill and eat into your profit margins
- Finally, keep proper records of all documents (payments, tax returns, tax receipts, clarifications from tax authorities etc.). It is the only way you can properly defend your business in the event of an audit.