Nigeria: VAT treatment of contract cancellations, bad debts (COVID-19)

Nigeria: VAT treatment of contract cancellations

Taxpayers in Nigeria need to consider the impact of the coronavirus (COVID-19) pandemic on their businesses and in particular the expected increase in debt default rates, cancellations of contracts or “no-shows.”


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With regard to the treatment of bad debts, cancellations and no-shows for value added tax (VAT) purposes in Nigeria.

  • In Nigeria, no specific relief is provided by the VAT law with regard to bad debts. In practice, companies can make adjustments for VAT on bad debts once it is certain that the agreed payment that is subject to VAT has truly become irrecoverable. This is because taxpayers are required to act as agents of the tax authority (FIRS) and collect and report VAT on a cash basis.
  • There are no specific conditions or guidelines prescribed in the VAT law to claim VAT relief on bad debts or cancelled invoices. However, documentary evidence demonstrating efforts made by taxpayers to recover the debt may be required during the course of a tax audit.
  • In practice, companies reflect bad debts or cancelled invoices in the monthly self-assessment VAT Form 002 under the “sales adjustment” column. Credit notes may also be issued to indicate that the debt has been written off, and no payment is expected.
  • Similarly, there are no specific guidelines regarding the correct treatment of cancellation or no-show fees in Nigeria. An argument can be made that such fees are not to be subject to VAT because there was no exchange of a good or service for the “consideration” received. However, when a deposit was made, there was a risk that the FIRS may seek to collect VAT on such transactions on the basis that any amount paid on account will be regarded as consideration for VAT purposes. This will be in respect of the customer’s right to benefit from the performance of the obligations that arise from the contract to provide services or goods—regardless of whether the customer exercises that right. This risk may be reduced when there was no initial deposit for the goods or services to be supplied.
  • Invoices need to be structured so that they clearly state the nature of a transaction so that the FIRS does not subject an exempted or zero-rated good or service to VAT at a rate of 7.5%.  

Read an April 2020 report [PDF 164 KB] prepared by the KPMG member firm in Nigeria

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