Jtax Consult

.

The recent amendment to the Nigerian VAT Act has extended the application of input VAT and output VAT to all sectors and industries, including the Banking and Financial Services industry, which previously could not set off input VAT against output VAT.

Before January 2026, banks and certain financial institutions were required to capitalize VAT on capital expenditure (CAPEX) and expense VAT on operating expenditure (OPEX) because input VAT was not recoverable.

With the reform, input VAT is now claimable, subject to the proportion of vatable income to total income.

This guide explains the key concepts and provides practical accounting steps for VAT recognition, posting, and remittance.

1. Definition of Key Terms

Value Added Tax (VAT)VAT is a consumption tax charged on the supply of goods and services in Nigeria, except those specifically exempted by law. It is currently administered by the Nigeria Revenue Service (NRS) formerly Federal Inland Revenue Service.

VAT Output
Output VAT is the VAT collected on sales of taxable goods and services.

Businesses act as collecting agents.for FIRS and must remit output VAT after netting it against allowable input VAT.

2. Practical Steps for Accounting and Remitting VAT

A. Posting Entries for Purchases
(For entities NOT appointed by the Nigeria Revenue Service (NRS) to withhold VAT)

Journal Entry for Purchases (CAPEX, OPEX, or inventory)

Dr. Asset or Expense Account (Net of VAT cost)Dr. VAT Receivable Account (VAT element)Cr. Supplier Account (Cost + VAT)

This captures the net cost as expense/asset and recognizes VAT receivable for offset against output VAT.

B. Posting Entries for SalesJournal Entry for Sales

Dr. Customer / Accounts Receivable (Gross amount)Cr. Sales (VAT exclusive price) Cr. VAT Output / Payable (VAT element)

The business recognizes revenue and records VAT collected on behalf of NRS.

C. VAT Remittance (On or Before the 21st of the Following Month)

At month-end, compare the VAT Output and VAT Input balances:

i. If Output VAT > Input VATYou remit the difference to FIRS.

ii. If Input VAT > Output VATThere is no amount to remit, and you carry forward a VAT credit

This credit can reduce future VAT payable.

3. Special Rule for Banks, Telcos, Oil Servicing Companies, and Others Appointed by NRS to Withhold VAT.

Entities appointed to withhold VAT at source (WHT VAT) must apply a different purchase posting structure.

Journal Entry for Purchases (for VAT Withholding Agents)

Dr. Asset or Expense Account (Net of VAT cost)
Dr. VAT Receivable Account (VAT element)
Cr. Supplier Account (Cost minus VAT)
Cr. VAT Collection Account (VAT withheld)

Here:-

The supplier is paid net of VAT- The VAT withheld is recorded in a VAT Collection Account, this Withheld VAT must be remitted in full to NRS regardless of input/output comparison.

All other processes sales posting, output VAT recognition, remittance—remain the same.

4. Important Rule: Proportion of Vatable Income.

Under the VAT Act, input VAT is recoverable only to the extent that the taxpayer earns vatable income.

Formula:Recoverable Input VAT= {Input VAT} times frac {Vatable Income}\{Total Income}

This is especially critical for:

• Banks
• Insurance companies
• Financial institutions
• Entities with mixed vatable and exempt revenues.

These organizations must regularly test and apply the proportion to avoid overclaiming input VAT.

5. Why Proper VAT Accounting Matters

Setting up correct VAT processes prevents:-

1. Loss of tax credits
2. Overstated expenses
3. Underpayment or overpayment of tax
4. Penalties and interest from NRS
5. Distorted financial statements

A structured VAT accounting system ensures compliance and optimizes recoverable VAT.

The extension of input-output VAT to all sectors including the financial industry is a significant shift in Nigeria’s tax landscape. Businesses must realign their accounting processes to reflect the new rules, especially around purchase postings, VAT withholding, and the application of the vatable income proportion.