Are you a VATable person under the Value Added Tax Act and have failed to fulfil the obligations expected of a VATable person? If yes, you probably already know that you have defaulted and there are associated penalties for every VATable offence. It could be you failed to register for VAT or failed to submit returns to the FIRS. Or your offence could be a failure to remit VAT or failure to notify change of your business address or permanent cessation of business. Whatever your offence might be, read on as we discuss how to calculate the VAT penalty in Nigeria.
How to calculate VAT penalty in Nigeria would be discussed below:
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What is the VAT Rate in Nigeria?
The current VAT rate in Nigeria is 7.5%.
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Who is Considered a VATable Person Under the Value Added Tax Act (as amended)?
Before the recent amendments to the Value Added Tax Act, a taxable person referred to both individuals and corporate bodies that trade in taxable supplies. However, the recent amendments to the Value Added Tax Act created a threshold for taxable persons to be individuals and corporate bodies with taxable supplies of N25 million or more.
The implication of the introduction of this threshold of N25 million for compliance with VAT obligations, therefore, excludes suppliers that fall below the above-stated threshold from complying with the obligations of a taxable person under the VAT Act. Therefore only suppliers with a threshold of N25 million and above are obligated to:
- issue VAT notices
- charge and collect VAT
- file VAT returns
- remit the VAT collected
However, a supplier below the N25 million threshold may voluntarily charge, collect, remit the VAT collected, and file monthly returns to the Federal Inland Revenue Service (FIRS) at any time of its discretion. Before such a supplier can do so, the FIRS must be informed prior, which thereby makes such a person (individuals and corporate bodies) subject to the provisions of the VAT Act applicable to suppliers with N25 million and above.
The introduction of this N25 million threshold for compliance with VAT obligations does not cover companies engaged in upstream petroleum operation, even when such company has:
- not commenced trade or business operations
- no turnover
- turnover not up to the N25 million threshold
It is important to note that where a supplier expects to meet or has met the N25 million threshold in a calendar year, that supplier becomes taxable under the VATA, even when in subsequent years it fails to meet the N25 million turnover threshold.
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Determination of N25 Million Turnover Threshold
The amended Value Added Tax Act outlines four ways that determine if a supplier of VATable goods and services meets the criteria of the N25 million turnover threshold. The first is a taxable person who has made taxable supplies of N25 million before the introduction of this current VAT threshold shall go on with charging, collecting, remitting the tax, and filing monthly VAT returns, even when such a taxable person fails to make N25 million on taxable supplies in the current year.
Another determination of a taxable person under the VAT Act is one who did not fulfil the N25 million taxable supplies before the 1st of February 2020 (the date of the commencement of the new VAT tax rate of 7.5%) but attains the threshold of N25 million taxable supplies at any time within the year. And upon attainment of the N25 million threshold, such supplier shall immediately commence to charge, collect, remit the tax, and file monthly returns.
Another criterion for determining the N25 million threshold of a supplier of VATable goods and services has not yet attained the threshold but expects to attain the N25 million threshold at a future date within the calendar year. Such a supplier is therefore permitted to forthwith start to charge, collect, remit the tax, and file monthly returns to the Federal Inland Revenue Service.
In addition to the three scenarios above, a taxable person who makes taxable supplies amounting to N25 million and above within a year, even if part of the whole of such supplies are exempt from VAT, is required to file monthly returns to the Federal Inland Revenue Service (FIRS).
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What Goods and Services are Exempt from VAT?
The First Schedule of the VAT Act contains exempted goods and services. They are as follows:
Goods Exempted from VAT in Nigeria:
- Medical and pharmaceutical products
- Basic food items
- Books and educational materials
- Baby products
- Fertilizer, locally produced agricultural and veterinary medicine, farming machinery, and farming transportation equipment
- Oil exports;
- Plant, machinery, and goods imported for use in the export processing zone
or free trade zone
- Plant, machinery, and equipment purchased for utilisation of gas in downstream petroleum operations
- Tractors, ploughs, and agricultural equipment and implements purchased for agricultural purposes
- Locally manufactured sanitary towels, pads, or tampons;
- Commercial aircraft, commercial aircraft engines, and commercial aircraft spare parts.
Services Exempted from VAT in Nigeria:
- Medical Services;
- Services rendered by microfinance banks, people’s banks, and mortgage Institutions
- Plays and performances conducted by educational institutions as part of learning
- All exported services
- Tuition relating to nursery, primary, secondary, and tertiary education
- Airline transportation ticket
- Hire, rental, or lease of tractors, ploughs, and other agricultural equipment for agricultural purposes
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What is Zero-rated VAT and What Transactions are Zero-rated?
The Value Added Tax Act makes provisions for some VATable goods and services to be subject to zero per cent VAT and such transactions involving such goods and services include:
- Goods and services purchased by diplomats
- Goods and services purchased by humanitarian donor-funded projects
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How to Calculate VAT Penalty for Failure to Notify Change of Address or Permanent Cessation of Trade or Business in Nigeria
It is an offence under the Value Added Tax Act for a VATable person to change his business address or permanently stop trade or business in Nigeria without duly notifying the FIRS. The imposed penalty for the aforementioned offences is N50,000 for the first month in which the failure occurs and N25,000 for each subsequent month the failure persists.
Illustration
What would be the penalty for AAT Limited, a taxable person under the act, who permanently ceased trading (or doing business) all through 2021 (January – December) but failed to let the relevant tax authorities know until the FIRS found out on January 1, 2022?
Find the applicable solution below:
| Month | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Cumm.
Total |
| Jan | – | – | |||||||||||
| Feb | N50,000 | – | N50,000 | ||||||||||
| Mar | N25,000 | N50,000 | – | N125,000 | |||||||||
| Apr | N25,000 | N25,000 | N50,000 | – | N225,000 | ||||||||
| May | N25,000 | N25,000 | N25,000 | N50,000 | – | N350,000 | |||||||
| June | 25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N500,000 | ||||||
| Jul | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N675,000 | |||||
| Aug | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N875,000 | ||||
| Sep | N25,0000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N1,100,000 | |||
| Oct | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N1,350,000 | ||
| Nov | N25,0000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N1,625,000 | |
| Dec | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | N1,925,000 | |
| Total | N300,000 | N275,000 | N250,000 | N225,000 | N200,000 | N175,000 | N150,000 | N125,000 | N100,000 | N75,0000 | N50,000 | – | N1,925,000 |
The cumulative amount of penalty for failure of AAT to notify the FIRS of cessation of trade is N1,925,000 only.
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How to Calculate VAT Penalty for Failure to Register for VAT in Nigeria
The Value Added Tax Act (as amended) imposes a penalty of N50,000 for the first month a VATable person fails to register his business for VAT (after the initial 6 months grace from the commencement of business) and N25,000 for each subsequent month in which the failure continues.
Illustration
What is the VAT penalty AAL Limited, a VATable person, is expected to for not failing to register for VAT from January 1, 2022, to December 2022? (We assume AAL Limited has already exceeded the 6 months grace as of January 1, 2022, and FIRS found out of this on January 1, 2023).
| Month | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Cumm.
Total |
| Jan | – | – | |||||||||||
| Feb | N50,000 | – | N50,000 | ||||||||||
| Mar | N25,000 | N50,000 | – | N125,000 | |||||||||
| Apr | N25,000 | N25,000 | N50,000 | – | N225,000 | ||||||||
| May | N25,000 | N25,000 | N25,000 | N50,000 | – | N350,000 | |||||||
| June | 25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N500,000 | ||||||
| Jul | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N675,000 | |||||
| Aug | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N875,000 | ||||
| Sep | N25,0000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N1,100,000 | |||
| Oct | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N1,350,000 | ||
| Nov | N25,0000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N1,625,000 | |
| Dec | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | N1,925,000 | |
| Total | N300,000 | N275,000 | N250,000 | N225,000 | N200,000 | N175,000 | N150,000 | N125,000 | N100,000 | N75,0000 | N50,000 | – | N1,925,000 |
The cumulative amount of penalty for failure to register for VAT from the above illustration is N1,925,000 only.
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How to Calculate VAT Penalty for Failure to Submit VAT Returns in Nigeria
When a VATable person fails to submit VAT returns to the FIRS, the Value Added Tax Act imposes a penalty of N50,000 for the first month in which the failure occurs and N25,000 for each subsequent month in which the failure continues.
Illustration
Here’s an example you can use to learn how to calculate VAT penalty for failure to submit VAT returns:
AAT Limited, a taxable person under the Value Added Tax Act, approached FIRS Ikorodu Tax Office on January 1, 2023, to file its annual returns for the 2022 assessment year. In the course of reviewing its file, it was discovered that AAT Limited did not submit VAT returns for 2022 (January – December) transactions. The applicable penalty according to Section 35 of the VAT Act is determined as follows:
| Month | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Cumm.
Total |
| Jan | – | – | |||||||||||
| Feb | N50,000 | – | N50,000 | ||||||||||
| Mar | N25,000 | N50,000 | – | N125,000 | |||||||||
| Apr | N25,000 | N25,000 | N50,000 | – | N225,000 | ||||||||
| May | N25,000 | N25,000 | N25,000 | N50,000 | – | N350,000 | |||||||
| June | 25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N500,000 | ||||||
| Jul | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N675,000 | |||||
| Aug | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N875,000 | ||||
| Sep | N25,0000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N1,100,000 | |||
| Oct | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N1,350,000 | ||
| Nov | N25,0000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | – | N1,625,000 | |
| Dec | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N25,000 | N50,000 | N1,925,000 | |
| Total | N300,000 | N275,000 | N250,000 | N225,000 | N200,000 | N175,000 | N150,000 | N125,000 | N100,000 | N75,0000 | N50,000 | – | N1,925,000 |
The cumulative amount of penalty for failure to submit returns is N1,925,000 only.
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How to Calculate VAT Penalty for Failure to Remit VAT in Nigeria
Failure to remit VAT attracts a penalty of 10% of the VAT payable, plus interest at the prevailing Central Bank of Nigeria’s minimum rediscount rate (MRR).