Cash Vs Accrual: Unpacking The Value Addded Tax Remittance Dilemma In Nigeria

Introduction

The question of whether Value Added Tax (VAT) should be remitted on cash or accrual basis has puzzled some taxpayers over the years. This uncertainty persisted, even with the amendments made to the VAT Act (VATA) via various legislations. However, for some taxpayers, the question moved from, "should VAT be remitted on cash or accrual basis" to "when did the shift from accrual to cash basis of VAT remittance occur?" or "how can we confidently defend a cash basis of VAT remittance via the VATAs?". The newly enacted Nigeria Tax Act (NTA) and related legislations have stirred up still waters in this space, raising fresh concerns about the future basis for VAT remittance. This article aims to clarify this dilemma and offer guidance on the way forward.

Cash Vs Accrual Basis: What the Concepts Mean

Remitting VAT on cash basis simply means paying VAT on your sales only when your customers have paid (for the taxable supply) and claiming VAT on your purchases only when you have paid your supplier (for the taxable supply). Conversely, remitting VAT on accrual basis simply means paying VAT on sales once a sale is made and claiming VAT on purchases once the purchase is made.

For the latter, the taxpayer (or its representative) may have to determine the "time of supply", which is when one can be deemed to have made a sale or a purchase. This could be when the goods are available for use by the buyer/the service is provided to the seller, when ownership is transferred, when an invoice is issued, when payment is due/paid, etc. The applicable time of supply rule may be dependent on specific provisions of the law or by practice or, often, convenience.

Countries adopt different VAT remittance bases⎯some use a purely cash-based system, some an accrual-based system, while some apply a hybrid model where the specific basis adopted by the taxpayer would be dependent on various factors such as revenue thresholds, industry type, tax compliance history, amongst others, essentially, practicality and convenience.

The VAT Trail: Unfolding Legislations on the Timing of VAT Remittance in Nigeria

In 1993, Nigeria transitioned from the sales tax regime to the VAT regime. To clarify the legal basis for the timing of VAT remittances, we have examined below, key provisions of the VAT Act from inception to date. We have categorised these into three waves: The Pioneer Decree/Acts, the Finance Acts and the New Tax Reform. Our analysis focuses on five (5) core areas: i) the definition of input VAT; ii) the definition of output VAT; iii) the time of supply; iv) the basis for filing VAT returns; and v) the timing of VAT remittance.

A. The Pioneer Decree/Acts

The VAT decree no. 102 1993 was codified into law in 2004 as the VAT Act, CAP. V1 L.F.N. 2004 (herein subsequently referred to as "the pioneer VATA"). Section 12 and 14 respectively of the pioneer VATA stated that:

The above sections of the law also stated that the VAT paid to the supplier is known as "input tax", while the VAT collected from the consumer is known as output tax. In my view, although these sections authorized taxable persons to pay input tax and collect output tax, they neither specified nor determined when such VAT must be remitted to the tax authority. However, sections 15 and 16 respectively of the pioneer VATA stated that:

From a joint reading of sections 12, 14, 15 and 16, it could be inferred that the pioneer VATA required taxpayers to collect/pay VAT on all taxable supplies undertaken in a month, to report all such taxable supplies purchased or supplied, and remit the VAT on all such taxable supplies reported. Recall (as state above) that sections 12(2) and 14(2) of the pioneer Acts made it clear that input VAT and output VAT were inherently VAT paid and VAT collected respectively. Therefore, VAT ought to have been accounted for and remitted on cash basis from the onset. Assuming this view to be correct, it would mean that several taxpayers may have misunderstood said sections of the pioneer VATA. Hence, there was no consensus on the basis of VAT remittance. VAT was largely believed as requiring remittance on cash basis but some taxpayers opted to be conservative and remit same on accrual basis.

B. The Finance Acts

The Finance Act 2019 (FA19) did not amend the definition of input and output VAT as stated in sections

12 and 14 of the VATA. However, it amended sections 15 and 16 in a way that clarified the basis of VAT remittance. In lieu of the previous provision that required a return of "all taxable supplies purchased or supplied" to be filed, the new section 15 required a taxable person to make "a return of the input tax paid and output tax collected". Further, per the new section 16, on rendering a return as prescribed under section 15, a taxpayer was required, if the output tax collected exceeded the input tax paid to remit the excess to the Federal Inland Revenue Service ("FIRS", or "the Service").

In our view, adding the words, "paid" and "collected" to the phrases "input VAT" and "output VAT" respectively was redundant, an outright tautology, but they served the important purpose of emphasizing that VAT ought to be remitted on cash basis. Therefore, from 1 February 2020, the uncertainty as to whether VAT ought to be remitted on cash or accrual basis was resolved, solely by reason of the amendment of sections 15 and 16 (not section 12 and 14) of the VATA.

The Finance Act 2020 (FA20) introduced the concept of the "time of supply" by inserting a new section 2A. Per this insertion, the time of supply was simply the earlier of when an invoice/receipt is issued or payment is due/received. In our opinion, this insertion was necessary because FA19 amended section 2 of the VATA to redefine when goods and services should be deemed to be supplied in Nigeria, i.e. when Nigerian VAT should be charged (not remitted) on a particular transaction. In doing this, it introduced the terms, "time of supply" and "time of service provision" without defining them. This created a lacuna that FA20 filled via the insertion of section 2A. Notwithstanding the above, neither FA20 nor subsequent FAs directly amended sections 2A, 12, 14, 15 and 16 of the VATA in a way that impacted the basis of VAT remittance.

C. The New Tax Reforms: The Nigeria Tax Act (NTA) and the Nigeria Tax Administration Act (NTAA):

The NTA and the NTAA, which became effective on 1 January 2026, have repealed the VAT Act and introduced new but similar provisions for the imposition and administration of VAT.

The NTA does not make significant changes to the definition of input and output VAT. Per the provisions of section 151 and section 153 of the NTA, input and output VAT are still VAT paid/collected. However, Section 147 of the NTA expanded the concept of "time of supply" to include (amongst others) "when goods are delivered or made available for use". Hence, the time of supply will no longer be limited to when an invoice/receipt is issued, or when payment is due/received.

Section 22 of the NTAA guides the filing of VAT returns. Section 22(3) provides that, "The returns shall contain the input tax paid, output tax collected and VAT payable in respect of all taxable supplies in the preceding month". This emphasizes that taxpayers ought to file VAT returns on cash basis which is currently the practice in Nigeria. However, section 155(1) of the NTA states that,

The removal of the words "paid" and "collected" from section 155 (whether or not deliberate) cannot on its own change the basis of VAT remittance. This is because, by their definition in the NTA, input VAT and output VAT are VAT paid and VAT collected respectively. Therefore, the inclusion of these terms only ever were tautologies. However, this change may reignite old queries as to whether VAT should be remitted on cash or accrual basis. It becomes freshly arguable that actual VAT remitted may no longer be based on VAT returns filed; instead, VAT returns and remittances would simply share only the same deadline. This inference is also supported by section 22(2) of the NTAA which states that, "where the Service grants an extension of the period for filing the returns... ...such extension shall not imply the extension of time to pay the tax". Hence, taxpayers would be expected to remit VAT whether or not VAT returns have been filed.

Consequently, one could infer from the new tax laws that VAT should be reported on transaction basis (total sales and purchases in the period) while remittances should be made on cash basis.

Cash Vs Accrual Basis of VAT Remittance: Implication for Businesses

In analysing the implication of both bases of VAT remittance on businesses, we will be considering three (3) hypothetical businesses A, B and C:

• Business A is a supermarket with favourable customer and supplier relations because it conducts its business "over-the-counter" (i.e. on cash basis) and has locked in 60-day payment terms with its suppliers;
• Business B is a big restaurant with favourable customer relations but unfavourable supplier relations, because it sells strictly over-the-counter but its suppliers expect to be paid upfront; and,
• Business C is a manufacturing company within the Fast-Moving Consumer Goods sector. It maintains a favourable relationship with its suppliers from whom it enjoys 30-day payment terms, while its customer relations are less advantageous as its customers are granted 45-day payment terms.

Based solely on the timing of receipts from customers and payments to suppliers, we have stated below the implication of the accrual basis of VAT remittance on all three (3) businesses:

• Business A: The accrual basis would be beneficial to this business because it will allow the business to claim input VAT on all its purchases even where the business has not paid its supplier(s). Accordingly, Business A will be able to manage its cashflow better as it would typically have lesser VAT payable in the immediate.
• Business B: Recall, the time of supply is the earlier of when the goods are available for use by the buyer or when payment is due/paid (amongst others). Since this business settles its suppliers (inclusive of input VAT) upfront, payment will be made before the goods are available for use for this business. Accordingly, under the accrual basis it will claim input VAT incurred in accordance with the time of supply which would be when payment is made (akin to cash basis). Therefore, for this business, the line between cash and accrual basis blurs out.
• Business C: The accrual basis of VAT remittance will not be beneficial to this business because it will be required to pay VAT before it is collected from customers, which would erode its cashflow.

The cash basis of VAT remittance tends to be more favourable for businesses because the taxpayers do not have to pay VAT out of pocket to the tax authority (except where the taxpayer is the final consumer). In contrast, aside from straining a business' cashflow, with the accrual basis of VAT remittance there is a higher likelihood that the business would need to apply for VAT refunds in the event of a bad debt. This resultant VAT refund process may come with some costs⎯time, professional fees, etc. In addition, under the new tax laws, VAT refunds are time-bound. Hence, if a business fails to reconcile its books and seek a refund within a year, it risks permanently losing the VAT paid on a transaction that has gone bad.

Cash Vs Accrual Basis of VAT Remittance: Implication for Tax Compliance and Administration

Where the changes in section 155(1) of the NTA are interpreted as a shift from cash to accrual basis of VAT remittance, it may be impractical given the way the online compliance portal (the TaxPro Max portal) is currently structured⎯VAT payable is based on returns filed.

Consequently, the taxpayer may need to:

1. compute two different VAT liabilities for filing and remittance purposes;
2. update its ERP to take into consideration the differences in VAT remittance and VAT filing; and,
3. Liaise with the tax authority to determine how to remit its VAT on accrual basis (possibly outside the portal) after filing its returns on cash basis. This may result in a shift from the progress made towards convenience, transparency, the digitalization of the system and the Treasury Single Account (TSA) system, if not properly done.

All of the above may also lead to increased costs of VAT compliance.

The tax authority would not be spared as well. At the least, it may be required to:

1. update its portal to aid this dual compliance; or
2. provide alternative means of remitting the taxes due outside the online portal e.g. new bank account details, which would be a step away from the progress made towards digitalization of VAT compliance and ease in the VAT space.

Suggestions

Based on the foregoing, it is our suggestion that:

1. The tax authority should retain the cash basis of VAT remittance in its VAT administration system. Accordingly, VAT payable should be based on actual VAT collected and paid. This would ensure ease of VAT compliance.
2. The law makers should retain the words "paid" and "collected" in subsequent amendments to sections 155(1) of the NTA. This would ensure certainty in VAT legislation.
3. Section 22(2) of the NTAA should be deleted, as it creates a compliance gap. However, in the interim, to close this gap, when the tax authority grants an extension of the period for filing VAT returns, the publication should explicitly state that such extension applies to both returns and remittance.
4. The word, "incurred", as utilized in Section 155(4) of the NTA should be deleted or replaced by the word "paid". This would ensure certainty in the interpretation of the legislation.

Conclusion

In conclusion, in addressing the questions posed at the outset, VAT remittance did not transition from an accrual basis to a cash basis. Rather the FA19 merely served to clarify that VAT should be remitted on cash basis. It is our expectation that the foregoing analysis will aid any party seeking to confidently justify the cash-basis of VAT remittance under the various VATAs.

In the future, should the legislature amend the NTA and the NTAA, we hope the above analysis and recommendations are taken into consideration. Likewise, where the Nigeria Revenue Service (formerly the Federal Inland Revenue Service) issues any guideline on VAT compliance, as is its practice, we do hope that it considers the same. In providing its comment/directive, we would suggest that the tax authority considers what it would stand to lose if VAT is payable on cash basis. In our opinion, that would be NOTHING. However, the same cannot be said for the taxpayer, who may incur significant losses when required to pay VAT out of pocket, or most likely out of capital or retained earnings. This could stifle cashflow that would have otherwise supported business expansion. Such an outcome would undermine micro efforts to stimulate economic growth and investment and would be a huge step away from some of the key objectives of the tax reform.

The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.