Name: Finora
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Author: Finora

One of the most misunderstood aspects of Nigerian VAT is the relationship between input VAT and output VAT. Understanding this relationship is crucial for managing your cash flow, maximizing legitimate deductions, and staying compliant with NRS (Formerly FIRS) regulations.

What is Output VAT?

Output VAT is the VAT you charge and collect from your customers when you sell goods or services. As a VAT-registered business, you act as a collection agent for the government.

How Output VAT Works

When you sell a product for ₦100,000:

Net price: ₦100,000
VAT at 7.5%: ₦7,500
Total invoice: ₦107,500

The ₦7,500 is your output VAT. This money belongs to the government—you're simply collecting it on their behalf.

Output VAT Obligations

Charge VAT on all taxable supplies
Issue VAT-compliant invoices
Record output VAT separately in your accounts
Remit collected VAT to NRS (Formerly FIRS) monthly

What is Input VAT?

Input VAT is the VAT you pay on goods and services purchased for your business. This VAT can be deducted from your output VAT to reduce your payment to NRS.

How Input VAT Works

When you buy office supplies for ₦50,000:

Net price: ₦50,000
VAT at 7.5%: ₦3,750
Total paid: ₦53,750

The ₦3,750 is your input VAT. You can claim this back against your output VAT.

Input VAT Requirements

To claim input VAT, you must have:

A valid VAT invoice from the supplier
Goods/services used for making taxable supplies
The supplier must be VAT registered
The invoice must contain all required information

The VAT Calculation

Every month, your VAT position is calculated as:

Net VAT = Output VAT - Input VAT

Scenario	Result
Output > Input	You pay the difference to NRS
Input > Output	You have a VAT credit

Example Monthly Calculation

Description	Amount
Total sales	₦5,000,000
Output VAT collected (7.5%)	₦375,000
Total purchases	₦2,000,000
Input VAT paid (7.5%)	₦150,000
Net VAT payable	₦225,000

What Can You Claim Input VAT On?

Eligible Purchases

You can claim input VAT on:

Raw materials used in manufacturing
Goods for resale in retail/wholesale
Business equipment and machinery
Office supplies and consumables
Professional services (legal, accounting, consulting)
Utilities (electricity, water, internet)
Rent for business premises
Marketing and advertising expenses
Transport and logistics costs
Maintenance and repairs for business assets

Non-Eligible Purchases

You cannot claim input VAT on:

Category	Reason
Personal expenses	Not for business use
Entertainment (most cases)	Specifically disallowed
Purchases for exempt supplies	VAT recovery restricted
Motor vehicles (passenger)	Generally disallowed
Goods not received	No valid receipt
Purchases from non-VAT registered suppliers	No valid VAT invoice

Mixed Supplies: Apportionment Rules

If your business makes both taxable and exempt supplies, you cannot claim all your input VAT. You must apportion based on the ratio of taxable to total supplies.

Apportionment Formula

Recoverable Input VAT = Total Input VAT × (Taxable Supplies ÷ Total Supplies)

Example

A company has:

Taxable sales: ₦8,000,000
Exempt sales: ₦2,000,000
Total sales: ₦10,000,000
Total input VAT: ₦300,000

Recoverable input VAT = ₦300,000 × (₦8,000,000 ÷ ₦10,000,000) = ₦240,000

The remaining ₦60,000 becomes a business cost.

VAT Credits and Refunds

When You Have a VAT Credit

If your input VAT exceeds output VAT, you have a VAT credit. This happens when:

You make large capital purchases
Your sales are mostly zero-rated (exports)
Business is slow but expenses continue

What to Do with VAT Credits

Carry forward: Apply the credit to next month's VAT liability
Request a refund: Under certain conditions (primarily for exporters)

VAT Refund Process

VAT refunds are available for:

Exporters (zero-rated supplies)
Diplomatic missions
Businesses in certain industries

To apply for a refund:

Accumulate credits over multiple periods
Apply through NRS (Formerly FIRS)
Undergo a VAT audit
Receive refund or credit note

Note: The refund process can be lengthy. Many businesses prefer to carry credits forward.

Required Documentation for Input VAT Claims

Essential Invoice Elements

Every VAT invoice must contain:

Supplier's name and address
Supplier's VAT registration number
Buyer's name and address
Invoice date
Unique invoice number
Description of goods/services
Quantity and unit price
Total amount excluding VAT
VAT rate applied
VAT amount
Total amount including VAT

Record Keeping Requirements

Maintain these records for 6 years:

All VAT invoices (issued and received)
Credit notes
Import documentation
Export documentation
VAT returns filed
Payment receipts to NRS

Common Mistakes in VAT Credit Claims

1. Claiming Without Valid Invoices

You cannot claim input VAT based on:

Receipts without VAT breakdown
Pro-forma invoices
Quotations
Invoices from non-registered suppliers

2. Timing Errors

Claim input VAT in the period when:

You receive the goods/services, AND
You receive a valid VAT invoice

Not when you pay the supplier.

3. Incorrect Apportionment

If you make exempt supplies, failing to apportion input VAT is a compliance risk.

4. Claiming Personal Expenses

Ensure clear separation between business and personal expenses. Claiming personal expenses as business input VAT is fraud.

5. Over-Claiming Entertainment

Entertainment input VAT is generally not recoverable. Only claim if it meets strict business purpose criteria.

How Finora Manages Your VAT Position

Finora automates the entire input/output VAT process:

Automatic Classification

When you record transactions in Finora:

Sales are automatically tagged with output VAT
Purchases are tagged with input VAT
Non-claimable items are flagged

Real-Time VAT Dashboard

See your VAT position at any moment:

Cumulative output VAT for the month
Cumulative input VAT for the month
Projected VAT payable
Comparison with previous periods

Invoice Validation

Finora validates VAT invoices:

Checks for required fields
Flags missing supplier VAT numbers
Alerts you to non-compliant invoices

Apportionment Calculations

If you have mixed supplies, Finora:

Tracks taxable and exempt revenue separately
Calculates the recovery ratio
Applies apportionment automatically
Documents the calculation for audits

Credit Tracking

Never lose track of VAT credits:

Credits automatically carry forward
Clear visibility of credit balance
Alerts when credits should be refunded

Frequently Asked Questions

Can I claim input VAT on purchases made before registration?

Generally, no. Input VAT can only be claimed on purchases made after your effective registration date. However, there are limited exceptions for goods held in stock at registration.

What if my supplier charged the wrong VAT rate?

You can only claim the correct VAT amount. If overpaid, request a credit note from the supplier. If underpaid, ensure the supplier corrects their return.

Can I claim input VAT on bank charges?

Most bank charges are exempt from VAT in Nigeria, so there's no input VAT to claim. However, some banking services may carry VAT—check your bank statements.

How do I handle input VAT on imports?

VAT paid at customs on imports is claimable. Keep your customs documentation as proof. The VAT should appear on the Bill of Entry or duty receipt.

What if I accidentally claim too much input VAT?

File an amended return as soon as you discover the error. Pay any additional VAT plus interest. Proactive correction typically avoids penalties.

Conclusion

Understanding the relationship between input and output VAT is fundamental to Nigerian VAT compliance. By properly tracking your VAT position, maintaining valid documentation, and avoiding common pitfalls, you can minimize your VAT liability while staying fully compliant.

Finora takes the complexity out of VAT management. With automatic classification, real-time tracking, and intelligent reporting, you always know exactly where you stand.

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