Back to: Accounting 101
Welcome back!
Today, let’s talk about VAT, or Value Added Tax, which is an important part of business in Nigeria.
Introduction to VAT
VAT is a tax that businesses add to the price of goods and services. When you buy something in a store, VAT is included in the price.
How VAT Works:
When a business sells an item, it collects VAT from the customer. Then, the business pays this VAT to the government. For example, if you buy a book for N1,000 and VAT is 7.5%, you pay N1,075.
Recording VAT in Books:
Businesses need to record both VAT they collect from customers and VAT they pay on purchases
Value Added Tax (VAT) is a type of consumption tax levied on the value added to goods and services at each stage of production and distribution. In the United Kingdom, VAT is charged on most goods and services, with a few exceptions such as food, children’s clothing, and books. Businesses that are registered for VAT must charge VAT on their sales and pay it over to HM Revenue & Customs (HMRC).
The standard rate of VAT in the UK is currently 20 per cent, although some goods and services are subject to a reduced rate of 5 per cent or are zero-rated. Businesses must account for VAT on a regular basis, usually quarterly, using a VAT return. The return shows the total value of sales and purchases, the amount of VAT charged and paid, and the net amount of VAT due to or from HMRC. Businesses that are not registered for VAT are not required to charge VAT on their sales.
VAT can have a significant impact on a business’s cash flow, particularly if it is required to pay VAT on its purchases before it receives payment from its customers. To mitigate this, businesses can claim back the VAT they have paid on their purchases, known as input tax, against the VAT they have charged on their sales, known as output tax. This ensures that businesses only pay VAT on the value they have added to the goods and services they have sold.
Conclusion:
VAT is an important part of doing business in Nigeria. Businesses need to track it correctly to avoid issues with the government.
Evaluation:
How would you calculate VAT on a N2,000 product?
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