Who Should Charge VAT in Nigeria?

In recent months, one issue has generated significant debate within Nigeria’s business and tax community: Who exactly should be charging VAT?

Across markets, offices, service industries, and even the informal sector, many businesses have begun adding Value Added Tax (VAT) to their invoices.

In many cases, these businesses are neither required to charge VAT nor properly registered to remit it. The result has been rising costs of goods and services, confusion among consumers, and growing compliance risks for businesses.

The truth is simple but often misunderstood.

Quick Summary

• Not every business should charge VAT in Nigeria

• Small businesses with a turnover of ₦100 million are exempt

• Zero-rated supplies allow VAT recovery

• VAT-exempt supplies do not allow input recovery

• Unauthorised VAT charging creates penalties

Not every business is required to charge VAT in Nigeria under the new tax law.

The recently issued Certified True Copy (CTC) version of the Nigeria Tax Act (NTA) introduces important clarifications regarding VAT obligations, thresholds, and classifications of supplies.

These changes, together with the administrative provisions under the Nigerian Tax Administration framework, require businesses to reassess their VAT position carefully.

In this article, we break down the key VAT classifications, the small business exemption threshold, the controversy around zero-rated supplies, and why indiscriminate VAT charging is both unlawful and economically harmful.

The Growing VAT Problem in Nigeria

Nigeria’s VAT system is designed as a consumption tax collected by businesses on behalf of the government and remitted to the tax authority.

However, recent developments show that many businesses now add VAT to invoices as a default practice without verifying whether they are legally obligated to do so.

This trend has led to:

• Artificial inflation of prices

• VAT is being collected but not remitted

• Increased scrutiny from tax authorities

• Confusion among customers

• Reputational risks for non-compliant businesses

VAT compliance is not simply about adding 7.5% to every invoice. It requires an understanding of three critical issues:

1. Whether the business meets the VAT registration threshold

2. Whether the supply is VATable, zero-rated, or exempt

3. Whether the business has the authority to charge VAT

Without these considerations, VAT becomes a misuse rather than a compliance tool.

VAT Classification Under the Nigeria Tax Act (NTA)

Under the Nigeria Tax Act, VAT supplies fall into three major categories:

• Supplies subject to VAT at 7.5%

• Zero-rated supplies (0%)

• VAT-exempt supplies

Each category carries different compliance obligations and recovery rights.

Let us examine them in detail.

See Also: Download All Official Gazette Tax Reforms

1. Supplies Subject to VAT at 7.5%

These are goods and services that attract VAT at the standard rate of 7.5%. Businesses making these supplies are required to:

• Register for VAT (if above threshold)

• Charge VAT on their invoices

• File VAT returns

• Remit collected VAT

• Maintain proper VAT records

However, this obligation is not universal.

The Small Business Exemption Threshold

One of the most significant clarifications under the NTA is that businesses with:

• Annual turnover of ₦100 million or less, and

• Fixed assets not exceeding ₦250 million

are classified as small businesses (excluding professional firms).

Such businesses are not required to charge VAT or comply with VAT obligations, even if the goods or services they supply are VATable.

This means a qualifying small business must not:

• Register for VAT compulsorily

• Charge VAT on invoices

• File VAT returns

This provision is designed to reduce compliance burdens on small enterprises and encourage growth in the SME sector.

Voluntary Opt-Out Requires Approval

Under Section 22(5) of the tax administration framework, a small business that wishes to charge VAT voluntarily must apply to the relevant tax authority for approval.

In other words:

A small business cannot simply decide to begin charging VAT.

Approval must be granted before the business can opt out of its exemption status. This ensures that VAT registration remains regulated and that businesses do not exploit VAT as a pricing tool.

What Is Excluded from Threshold Calculation?

When determining whether a business has crossed the ₦100 million turnover threshold, certain items are excluded, including:

• Capital asset disposals

• Sale of business assets

This prevents artificial inflation of turnover figures due to one-off transactions.

2. Zero-Rated Supplies (0% VAT)

Zero-rated supplies attract VAT at 0%, not 7.5%.

At first glance, this may appear similar to VAT exemption. However, the distinction is significant.

Under zero-rating:

• Output VAT is charged at 0%

• Input VAT incurred in producing the goods or services is recoverable

This is an important benefit for suppliers.

For example, a manufacturer producing zero-rated goods may incur VAT on raw materials. Although the final supply is charged at 0%, the business is entitled to recover input VAT through refunds or set-off mechanisms.

The CTC Version Controversy

The gazetted version of the NTA previously contained a clear provision allowing VAT refunds on zero-rated supplies.

However, in the Certified True Copy (CTC) version, that express provision has been deleted.

This deletion has sparked interpretative debates among tax professionals.

Why?

Because zero-rating, by international VAT principles, inherently includes refund rights. Removing the explicit refund provision creates uncertainty regarding:

• Whether refund rights remain automatic

• Whether additional administrative guidance is required

• How quickly will refunds be processed

While the legal interpretation may still favor refund entitlement, practical challenges remain.

Refund Delays and Administrative Bottlenecks

Even where refund rights exist, businesses may face:

• Documentation reviews

• Administrative scrutiny

• Delays in refund processing

• System limitations on TaxProMax

Until refund systems operate seamlessly, zero-rated suppliers may experience cash flow strain.

This makes proper documentation and advisory support critical.

3. VAT-Exempt Supplies

VAT-exempt supplies are fundamentally different from zero-rated supplies.

For VAT-exempt items:

• VAT must not be charged

• Output VAT is nil

• Input VAT incurred cannot be recovered

Instead, input VAT becomes an expense and may be capitalized for assets.

Businesses supplying VAT-exempt goods must clearly reflect VAT as nil on invoices.

Charging VAT on exempt supplies is unlawful and may attract penalties.

Special Humanitarian Exception

Under Section 185 of the CTC version of the NTA, goods purchased for humanitarian donor-funded projects may qualify for input VAT recovery, even though they are VAT-exempt.

However:

• VAT must first be paid

• A refund must then be claimed from the tax authority

This is a narrow exception and does not apply broadly across exempt supplies.

Why Indiscriminate VAT Charging Is Dangerous

When businesses charge VAT without legal authority, several risks arise:

1. Legal Exposure

Charging VAT without registration or eligibility may violate tax laws.

2. Remittance Liability

If VAT is collected, it must be remitted. Failure to do so can result in penalties, interest, and prosecution.

3. Reputational Risk

Customers increasingly question VAT charges. Improper VAT practices can damage trust.

4. Price Inflation

Unnecessary VAT charging increases costs in the economy, especially affecting consumers and small businesses.

The Informal Sector Challenge

The informal sector presents unique difficulties. Many businesses lack structured accounting systems and may charge VAT simply because competitors do.

However, VAT compliance is not competitive behavior. It is statutory compliance.

Businesses must base VAT decisions on:

• Revenue threshold

• Supply classification

• Registration status

Not market imitation.

What Businesses Must Do Now

To remain compliant under the new VAT framework, businesses should:

1. Review Their Annual Turnover

Determine whether the ₦100 million threshold has been exceeded.

2. Assess Asset Position

Confirm whether fixed assets exceed ₦250 million.

3. Classify Supplies Correctly

Identify whether supplies are:

• VATable at 7.5%

• Zero-rated

• VAT-exempt

4. Avoid Unauthorised VAT Charging

Small businesses below threshold should not charge VAT without approval.

5. Maintain Documentation

Proper records protect businesses during audits.

The Bigger Picture: VAT Compliance Is About Structure, Not Revenue

VAT compliance should not be treated as a pricing strategy. It is a structured tax mechanism designed to ensure transparency and fairness in the tax system.

The reforms under the Nigeria Tax Act aim to:

• Reduce burdens on small businesses

• Improve clarity in VAT classification

• Align with global VAT principles

• Enhance compliance oversight

For businesses, the goal is not to maximize VAT charging but to ensure lawful compliance.

Final Thoughts

The debate around VAT charging in Nigeria reflects a deeper issue: insufficient understanding of tax obligations.

The Certified True Copy version of the Nigeria Tax Act provides clarity that:

• Not every business should charge VAT

• Small businesses may be exempt

• Zero-rated supplies differ from exempt supplies

• VAT recovery rights must be carefully interpreted

• Unauthorized VAT charging creates risk

VAT compliance begins with proper assessment — not assumptions.

As Nigeria’s tax system evolves, businesses must adapt responsibly. Charging VAT indiscriminately is not compliance; it is exposure.

Frequently Asked Questions (FAQs) About VAT in Nigeria

1. Who is required to charge VAT in Nigeria?

Only businesses that:

• Supply VATable goods or services, and

• Exceed the ₦100 million annual turnover threshold (excluding capital asset sales),
  are required to register and charge VAT under the Nigeria Tax Act.

Small businesses below the threshold are not required to charge VAT unless they obtain approval to opt out of their exemption status.

2. What is the VAT threshold for small businesses in Nigeria?

A business qualifies as a small business for VAT purposes if it has:

• Annual turnover of ₦100 million or less

• Fixed assets not exceeding ₦250 million (excluding professional firms)

Such businesses are exempt from mandatory VAT registration and charging obligations.

3. Can a small business voluntarily decide to charge VAT?

No. A small business cannot simply start charging VAT.

Under the tax administration provisions, a small business must formally apply to the tax authority for approval before opting out of its exemption.

Charging VAT without approval may expose the business to penalties.

4. What is the difference between zero-rated and VAT-exempt supplies?

Zero-rated supplies:

• VAT is charged at 0%

• Input VAT is recoverable

VAT-exempt supplies:

• VAT must not be charged

• Input VAT cannot be recovered

This distinction is critical for compliance and cash flow management.

5. Can businesses claim VAT refunds in Nigeria?

Businesses making zero-rated supplies may claim input VAT refunds, subject to documentation and tax authority approval.

However, refund processes may involve administrative reviews and delays.

6. What happens if a business charges VAT illegally?

If a business charges VAT without being eligible:

• It may be required to remit the VAT collected

• It may face penalties and interest

• It may face regulatory scrutiny

• Customers may demand refunds

Improper VAT charging creates both legal and reputational risks.

7. Should every invoice in Nigeria include VAT?

No.

VAT should only be included if:

• The business is VAT-registered (or above threshold), and

• The supply is VATable.

Not every business and not every supply attracts VAT.

8. Does VAT apply to exempt supplies?

No.

VAT-exempt supplies must not include VAT on invoices. Input VAT incurred on exempt supplies cannot be recovered.

Key Takeaways

• VAT compliance depends on both the threshold and the supply classification

• Small businesses cannot automatically opt into VAT charging

• Zero-rated is not the same as VAT-exempt

• Charging VAT incorrectly can create financial and legal exposure

This article is for informational purposes and does not constitute tax advice. Businesses should seek professional guidance tailored to their specific circumstances.