VAT on Services in Nigeria: What Every Business Must Know

Value Added Tax in Nigeria applies not just to goods but also to services. Understanding how VAT applies to services is crucial for service businesses, professional firms, and any company that provides or receives services. This guide covers everything you need to know about VAT on services in Nigeria.

The Basic Rule: Services Are Taxable

Under the Nigerian VAT Act, all services are taxable at 7.5% unless specifically exempted. This includes:

• Professional services
• Consulting and advisory services
• Technical services
• Management services
• Maintenance and repair services
• Telecommunications services
• Transportation services
• Hospitality services
• And virtually all other services

If you provide services and your taxable turnover exceeds ₦25 million annually, you must register for VAT and charge 7.5% on your invoices.

Services Subject to VAT

Professional Services

Service Type	VAT Status	Rate
Legal services	Taxable	7.5%
Accounting services	Taxable	7.5%
Audit services	Taxable	7.5%
Tax advisory	Taxable	7.5%
Engineering services	Taxable	7.5%
Architectural services	Taxable	7.5%
Management consulting	Taxable	7.5%
IT consulting	Taxable	7.5%

Technical and IT Services

• Software development
• IT support and maintenance
• System installation
• Network services
• Cloud computing services
• Data processing services

Business Services

• Advertising and marketing
• Public relations
• Recruitment services
• Security services
• Cleaning services
• Office administration services

Telecommunications

• Mobile phone services
• Internet services
• Data services
• Value-added telecom services

Hospitality and Entertainment

• Hotel accommodation
• Restaurant services
• Catering services
• Event management
• Entertainment services

Exempt Services

Certain services are specifically exempt from VAT:

Medical and Health Services

• Hospital services
• Clinical services
• Medical consultations
• Laboratory and diagnostic services
• Pharmaceutical services

Note: This exemption applies to core medical services. Related services like hospital catering or gift shop sales may still be taxable.

Educational Services

• School fees (all levels)
• Training directly related to formal education
• Educational counseling
• Examination services

Note: Corporate training and professional development may be taxable.

Financial Services

Many financial services are exempt:

• Banking services (account maintenance, transfers)
• Insurance services
• Pension fund management
• Securities trading

Note: Some ancillary financial services may be taxable.

Exported Services

Services performed for clients outside Nigeria may qualify as exported services and be zero-rated or exempt. This depends on:

• Where the service is consumed
• Location of the recipient
• Nature of the service

Charging VAT on Service Invoices

Invoice Requirements

Every VAT invoice for services must include:

1. Your business details

• Company name
• Address
• VAT registration number

1. Client details

• Name
• Address

1. Invoice information

• Unique invoice number
• Date of issue
• Description of services

1. Financial details

• Service fee (net of VAT)
• VAT amount (7.5% of service fee)
• Total amount payable

Sample Service Invoice Layout

INVOICE
ABC Consulting Limited VAT Reg: 12345678-0001 15 Marina Road, Lagos
To: XYZ Corporation Limited 45 Broad Street, Lagos
Invoice No: INV-2025-0042 Date: January 15, 2025
Description                              Amount
---------------------------------------- -------- Management Consulting Services           ₦1,000,000
Strategic planning workshop
Implementation roadmap
Follow-up support
Subtotal                                 ₦1,000,000 VAT @ 7.5%                                  ₦75,000
---------------------------------------- -------- TOTAL DUE                                ₦1,075,000
Payment due within 30 days

VAT on Imported Services (Reverse Charge)

When you receive services from a non-resident supplier, you may be required to account for VAT under the reverse charge mechanism.

What is Reverse Charge?

Instead of the foreign supplier charging Nigerian VAT, the Nigerian recipient:

1. Self-assesses the VAT due
2. Includes it in their VAT return
3. May claim input VAT if eligible

When Does Reverse Charge Apply?

Reverse charge applies when:

• The supplier is outside Nigeria
• The service is consumed in Nigeria
• The service would be taxable if supplied locally

Common Imported Services

• International consulting
• Foreign software licenses
• Cloud services from overseas providers
• Technical services from parent companies
• Management fees to foreign affiliates

Accounting for Reverse Charge

Step 1: Calculate VAT on the foreign invoice

• Invoice amount: $10,000
• Exchange rate: ₦1,500/$1
• Naira equivalent: ₦15,000,000
• VAT (7.5%): ₦1,125,000

Step 2: Include in VAT return

• Add ₦1,125,000 to output VAT
• If service is for taxable supplies, claim ₦1,125,000 as input VAT
• Net effect may be zero if fully recoverable

Step 3: Document the transaction

• Keep foreign invoice
• Record exchange rate used
• Maintain calculation workings

VAT and Withholding Tax on Services

Services in Nigeria often attract both VAT and Withholding Tax (WHT). These are separate obligations:

The Interaction

Tax	Rate	Who Pays	When
VAT	7.5%	Recipient (added to price)	Monthly remittance
WHT	5-10%	Recipient (deducted from price)	Monthly remittance

Example Transaction

Service fee: ₦1,000,000

Supplier charges:

• Service fee: ₦1,000,000
• VAT: ₦75,000
• Total invoice: ₦1,075,000

Recipient pays:

• Invoice amount: ₦1,075,000
• Less WHT (10% of ₦1,000,000): -₦100,000
• Net payment to supplier: ₦975,000

Recipient remits:

• WHT to NRS (Formerly FIRS): ₦100,000
• (Supplier remits VAT of ₦75,000 in their return)

Important Notes

• WHT is calculated on the net amount (before VAT)
• VAT is calculated on the service fee only
• WHT is the recipient's obligation to deduct and remit
• VAT is the supplier's obligation to collect and remit

Mixed Service Providers

If your business provides both taxable and exempt services, you face the apportionment challenge.

Example: Training Company

A training company provides:

• Corporate training (taxable): ₦20,000,000
• Educational services (exempt): ₦10,000,000
• Total: ₦30,000,000

Recovery ratio: ₦20,000,000 ÷ ₦30,000,000 = 66.67%

Input VAT of ₦600,000 paid on expenses:

• Recoverable: ₦600,000 × 66.67% = ₦400,020
• Non-recoverable (cost): ₦199,980

Place of Supply Rules

For services, determining where VAT applies can be complex:

General Rule

Services are taxable where they are consumed or utilized.

Specific Rules

Service Type	Place of Supply
Services related to land	Where land is located
Professional services	Where recipient is located
Technical services	Where service is performed
Digital services	Where recipient is located
Transport	Where journey occurs

Implications

• If service is consumed in Nigeria by Nigerian recipient: Nigerian VAT applies
• If service is consumed outside Nigeria: May be zero-rated or exempt
• If service is consumed in Nigeria by foreign recipient: Still taxable

Common Compliance Issues

Issue 1: Not Charging VAT on Services

Mistake: Assuming services aren't subject to VAT because you're "not selling anything physical."

Consequence: Under-declaration of output VAT, penalties, and interest.

Issue 2: Incorrect Exempt Classification

Mistake: Treating corporate training as exempt educational services.

Consequence: VAT assessments on all "exempt" invoices.

Issue 3: Ignoring Reverse Charge

Mistake: Not accounting for VAT on imported services.

Consequence: Under-declaration, potential penalties during audit.

Issue 4: WHT and VAT Confusion

Mistake: Deducting WHT from VAT-inclusive amount or not collecting VAT because WHT was deducted.

Consequence: Incorrect remittances to NRS (Formerly FIRS).

Record Keeping for Service VAT

Maintain these records for at least 6 years:

Output VAT Records

• All service invoices issued
• Credit notes for adjustments
• Client contracts showing VAT treatment
• Revenue analysis by service type

Input VAT Records

• Supplier invoices for services received
• Proof of payment
• Service contracts
• Reverse charge calculations for imported services

Supporting Documents

• Client communications about VAT treatment
• Evidence of service delivery
• Exchange rate documentation for foreign invoices
• Apportionment calculations

How Finora Manages Service VAT

Finora automates VAT on services with precision:

Service Invoice Generation

Create professional invoices with:

• Automatic VAT calculation at 7.5%
• Correct format for NRS (Formerly FIRS) compliance
• Separate VAT line item
• All required invoice elements

Exempt Service Tracking

When you create exempt services:

• No VAT added to invoices
• Input VAT apportionment automatically calculated
• Clear reporting on exempt revenue

Reverse Charge Management

For imported services:

• Record foreign invoices with currency conversion
• Automatic reverse charge calculation
• Proper VAT return treatment

WHT Integration

Track the relationship between VAT and WHT:

• Record services received with WHT deduction
• Calculate correct VAT on gross service amount
• Generate WHT certificates
• Reconcile payments

Monthly VAT Position

Real-time dashboard showing:

• Output VAT from service invoices
• Input VAT on services received
• Reverse charge VAT
• Net VAT payable

Frequently Asked Questions

Do freelancers need to charge VAT?

If your annual taxable turnover exceeds ₦25 million, you must register for VAT and charge 7.5% on your services, even as a freelancer or sole proprietor.

Is VAT charged on retainers?

Yes. Monthly retainer fees for services are subject to 7.5% VAT. Issue a VAT invoice each month when you invoice the retainer.

What about services to government?

Services to government agencies are still subject to VAT. However, the government entity may be required to withhold 100% of the VAT (full deduction at source) and remit directly to NRS (Formerly FIRS).

Are insurance commissions VATable?

Commission earned on insurance sales is typically exempt as it's part of the financial services exemption. However, other insurance-related services may be taxable.

How do I handle VAT on milestone payments?

VAT is due when you invoice, not when you receive payment. If you invoice for project milestones, charge VAT on each milestone invoice regardless of payment timing.

Conclusion

VAT on services in Nigeria follows clear rules: most services are taxable at 7.5%, with specific exemptions for medical, educational, and financial services. Service providers must charge VAT, issue compliant invoices, and file monthly returns.

The complexity increases with imported services (reverse charge), mixed supplies (apportionment), and the interaction with withholding tax. Proper systems and record keeping are essential for compliance.

Finora handles all these complexities automatically—from generating VAT-compliant service invoices to calculating reverse charge on imported services and tracking your real-time VAT position.

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