VAT Reverse Charge Mechanism in Nigeria: Complete Guide

When Nigerian businesses import services from foreign suppliers, a special VAT rule applies: the reverse charge mechanism. Instead of the foreign supplier charging Nigerian VAT (which they cannot do), the Nigerian buyer self-assesses and accounts for the VAT. This guide explains how the reverse charge works and how to stay compliant.

What is the VAT Reverse Charge?

The reverse charge mechanism shifts VAT accounting responsibility from the supplier to the recipient. Under normal VAT rules:

• Supplier charges VAT
• Supplier collects from customer
• Supplier remits to tax authority

Under reverse charge:

• Supplier does not charge Nigerian VAT
• Recipient calculates VAT due
• Recipient declares as both output and input VAT (if eligible)
• Net effect may be zero for fully taxable businesses

When Does Reverse Charge Apply?

Conditions for Reverse Charge

The reverse charge applies when all these conditions are met:

1. Service is imported - The supplier is located outside Nigeria
2. Service is consumed in Nigeria - The benefit of the service is received in Nigeria
3. Recipient is VAT-registered - The Nigerian recipient is registered for VAT
4. Service would be taxable domestically - If the same service were provided by a Nigerian supplier, it would attract VAT

Services Commonly Subject to Reverse Charge

Service Type	Examples
Professional services	Legal, accounting, consulting from foreign firms
Technical services	Engineering, IT support from overseas
Management services	Parent company management fees
Software licenses	SaaS subscriptions, software purchases
Intellectual property	Royalties, trademark licenses
Marketing services	International advertising, PR services
Training	Online courses, foreign training providers
Cloud services	AWS, Google Cloud, Microsoft Azure

How to Calculate Reverse Charge VAT

Step-by-Step Calculation

Step 1: Determine the taxable value

Start with the full invoice amount in the foreign currency.

Step 2: Convert to Nigerian Naira

Use the CBN exchange rate on the date of the invoice or payment (be consistent).

Step 3: Apply VAT rate

Calculate 7.5% of the Naira equivalent.

Worked Example

Scenario: Your company receives consulting services from a UK firm.

Item	Amount
Invoice amount	£10,000
Invoice date	January 15, 2025
CBN exchange rate	₦1,900/£1
Naira equivalent	₦19,000,000
VAT at 7.5%	₦1,425,000

The ₦1,425,000 is the reverse charge VAT to be accounted for.

Accounting for Reverse Charge

Journal Entries

When you receive a foreign service invoice:

If input VAT is fully recoverable:

Debit: Service Expense         ₦19,000,000
Debit: Input VAT               ₦1,425,000 Credit: Output VAT (reverse)   ₦1,425,000 Credit: Accounts Payable       ₦19,000,000

The input and output VAT offset each other, resulting in no net VAT payment.

If input VAT is not recoverable (exempt business):

Debit: Service Expense         ₦20,425,000
Credit: Output VAT (reverse)   ₦1,425,000 Credit: Accounts Payable       ₦19,000,000

You must pay ₦1,425,000 to NRS (Formerly FIRS), and it becomes a business cost.

VAT Return Treatment

In your monthly VAT return:

Output VAT section:

• Include the reverse charge VAT in your output VAT
• Some forms have a specific line for reverse charge

Input VAT section:

• If eligible, include the same amount as input VAT
• Document the calculation supporting the claim

Input VAT Recovery on Reverse Charge

When Can You Claim Input VAT?

You can claim the reverse charge VAT as input if:

1. The service is used for making taxable supplies

• If your business makes only taxable supplies, full recovery
• If mixed supplies, apportionment applies

1. You have proper documentation

• Foreign supplier invoice
• Proof of payment
• Reverse charge calculation
• Evidence service was received

1. The expense is allowable

• Normal input VAT rules apply
• Entertainment, personal use, etc. are restricted

Apportionment for Mixed Supplies

If your business makes both taxable and exempt supplies:

Example:

• Taxable supplies: 80%
• Exempt supplies: 20%
• Reverse charge VAT: ₦1,425,000

Recoverable input VAT: ₦1,425,000 × 80% = ₦1,140,000 Non-recoverable (cost): ₦285,000 Net VAT payable: ₦1,425,000 - ₦1,140,000 = ₦285,000

Common Reverse Charge Scenarios

Scenario 1: Software Subscriptions (SaaS)

Your company subscribes to Salesforce (US-based):

Details	Amount
Monthly subscription	$500
Annual cost	$6,000
Exchange rate	₦1,500/$1
Naira equivalent	₦9,000,000
Reverse charge VAT	₦675,000

Treatment: Include ₦675,000 as output VAT. If used for taxable supplies, claim as input VAT.

Scenario 2: Management Fees to Parent Company

Nigerian subsidiary pays UK parent for management services:

Details	Amount
Annual management fee	£500,000
Exchange rate	₦1,900/£1
Naira equivalent	₦950,000,000
Reverse charge VAT	₦71,250,000

Treatment: This is significant. Ensure proper documentation and transfer pricing compliance.

Scenario 3: International Training

Staff attend a training course in South Africa:

Details	Amount
Training fee	R50,000
Exchange rate	₦95/R1
Naira equivalent	₦4,750,000
Reverse charge VAT	₦356,250

Treatment: Training consumed partly in South Africa, partly applied in Nigeria. If training benefits Nigerian operations, reverse charge may apply.

Scenario 4: Exempt Business Receiving Services

A hospital (exempt from VAT) receives consulting services from abroad:

Details	Amount
Consulting fee	$20,000
Exchange rate	₦1,500/$1
Naira equivalent	₦30,000,000
Reverse charge VAT	₦2,250,000

Treatment: Hospital must pay ₦2,250,000 to NRS. Cannot claim input VAT as supplies are exempt. This is an additional cost.

Documentation Requirements

Essential Records

For every reverse charge transaction, maintain:

1. Foreign supplier invoice

• Must show service description
• Amount in foreign currency
• Date of invoice

1. Exchange rate evidence

• CBN rate on relevant date
• Screenshot or printout of rate source

1. Calculation workings

• Conversion calculation
• VAT calculation at 7.5%

1. Proof of payment

• Bank transfer confirmation
• Statement showing payment

1. Contract or agreement

• Terms of service
• Evidence of what was provided

1. Evidence of service receipt

• Deliverables received
• Reports, software access, etc.

Record Retention

Keep all reverse charge documentation for at least 6 years for NRS (Formerly FIRS) audit purposes.

Interaction with Withholding Tax

Imported services may also be subject to Withholding Tax under Nigerian law.

Typical Scenario

Tax	Rate	Responsibility
Reverse charge VAT	7.5%	Self-assess and remit (may be recoverable)
WHT on imported services	10%	Deduct and remit (may be treaty-reduced)

Example with Both Taxes

Description	Amount
Foreign service invoice	$100,000
Exchange rate	₦1,500/$1
Naira equivalent	₦150,000,000
Reverse charge VAT (7.5%)	₦11,250,000
WHT (10%)	₦15,000,000
Payment to supplier	₦135,000,000

Remittances:

• VAT: ₦11,250,000 (less input claim if eligible)
• WHT: ₦15,000,000

Note: Check applicable tax treaties which may reduce WHT rates.

Common Compliance Errors

Error 1: Ignoring Reverse Charge Entirely

Mistake: Not accounting for VAT on foreign service invoices.

Risk: NRS (Formerly FIRS) assessments during audit, plus penalties and interest.

Solution: Review all foreign supplier payments and assess if reverse charge applies.

Error 2: Inconsistent Exchange Rates

Mistake: Using different exchange rates for different purposes.

Risk: Discrepancies in VAT calculations, audit queries.

Solution: Establish a consistent policy (e.g., always use CBN rate on invoice date).

Error 3: Claiming Input VAT Without Documentation

Mistake: Claiming reverse charge as input VAT without proper records.

Risk: Input VAT denied, assessments, penalties.

Solution: Maintain comprehensive documentation for every transaction.

Error 4: Not Applying to Exempt Businesses

Mistake: Thinking reverse charge doesn't apply to exempt businesses.

Reality: Exempt businesses must still account for output VAT but cannot claim input VAT.

Solution: Exempt businesses should budget for this additional cost.

Error 5: Incorrect Apportionment

Mistake: Claiming full input VAT when making mixed supplies.

Risk: Over-claiming input VAT, assessments during audit.

Solution: Apply correct apportionment ratio to reverse charge input VAT.

Reverse Charge and Digital Services

The Rise of Digital Services

With the growth of digital services, reverse charge is increasingly relevant:

• Cloud computing (AWS, Azure, Google Cloud)
• Software subscriptions (Microsoft 365, Adobe Creative Cloud)
• Digital advertising (Google Ads, Facebook Ads)
• Online platforms and tools
• Streaming services for business

Nigeria's Digital Services Approach

Nigeria has introduced measures to capture VAT on digital services, including:

• Requirements for foreign digital service providers to register
• Reverse charge as backup when providers don't register
• Bank-based collection mechanisms

Practical Approach

1. Check if the foreign digital provider charges Nigerian VAT
2. If not, apply reverse charge
3. Document the transaction properly
4. Include in your VAT return

How Finora Handles Reverse Charge

Finora automates reverse charge compliance:

Foreign Invoice Recording

When entering a foreign supplier invoice:

• Select currency and enter amount
• System converts using current exchange rates
• Automatic reverse charge calculation
• Proper VAT treatment applied

Automatic VAT Treatment

Finora handles the complexity:

• Records output VAT for reverse charge
• Calculates eligible input VAT
• Applies apportionment if relevant
• Generates correct VAT return entries

Exchange Rate Management

• Access to current exchange rates
• Consistent rate application
• Historical rate tracking
• Audit trail of rates used

Documentation Support

• Attach foreign invoices to transactions
• Record exchange rate evidence
• Maintain calculation workings
• Generate audit-ready reports

VAT Return Preparation

When it's time to file:

• Reverse charge amounts correctly categorized
• Input VAT claims properly calculated
• Clear reporting of imported services
• NRS-compliant output format

Frequently Asked Questions

Does reverse charge apply to imported goods?

No. VAT on imported goods is paid at the point of importation (customs). Reverse charge applies to imported services only.

What if my supplier already charged foreign VAT?

Foreign VAT (e.g., UK VAT, US sales tax) is not Nigerian VAT. You still need to account for Nigerian reverse charge VAT. The foreign VAT is a cost unless you can recover it in that country.

Can I avoid reverse charge by getting services from Nigerian subsidiaries?

If the actual service is provided by the foreign parent through the Nigerian subsidiary, NRS (Formerly FIRS) may still apply reverse charge. Transfer pricing rules also apply. Consult a tax advisor for complex structures.

What's the deadline for reverse charge VAT?

Reverse charge VAT should be included in your regular monthly VAT return, due by the 21st of the following month.

Is there a threshold for reverse charge?

No. Reverse charge applies to all imported services regardless of value, once you meet the general conditions.

Conclusion

The reverse charge mechanism is an essential part of Nigerian VAT compliance for any business that imports services. Whether you're paying for international consulting, software subscriptions, or management fees to a parent company, understanding and correctly applying reverse charge is mandatory.

The key points to remember:

• Self-assess VAT at 7.5% on imported services
• Include in both output and input VAT (if eligible)
• Maintain comprehensive documentation
• Apply apportionment for mixed supply businesses

Finora automates the entire reverse charge process, from calculating the VAT on foreign invoices to generating compliant VAT returns with proper treatment of imported services.

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