September 27, 2019

The introduction of withholding tax (WHT) provisions in the Nigerian tax laws in 1977, imposed on taxpayers the obligation to deduct tax at source on payments for qualifying transactions. The tax deducted are to be remitted to the relevant tax authority within a statutory timeline, with penalty and interest charges imposed on defaulting taxpayers. However, the drive by taxpayers to comply with their withholding tax obligations appear impaired by the existence of certain vague provisions in the Nigerian tax laws. Where tax laws are difficult to understand, conflicting interpretations are given to these vague provisions and this may have detrimental effect on a country’s tax system, through limited compliance by taxpayers and punitive interpretations by the tax authorities. One key area of contention is the lack of clarity on the Phrase ‘sales in the ordinary course of business’, which the WHT Regulations issued pursuant to the Companies Income Tax Act and Personal Income Tax Act, have exempted from WHT. While the WHT Regulations lists certain transactions on which tax is to deducted, which include “all types of contracts and agency arrangements, other than sale in the ordinary course of business” (emphasis ours), the WHT Regulations neither defined nor provided any commentary on what constitutes a sale in the ordinary course of business. Recognising the likely impact of this ambiguity on taxpayers’ compliance with their WHT obligations, the Federal Inland Revenue Service (FIRS) attempted to provide some clarity on the phrase via the issuance of WHT Information Circulars in 1998, 2002, 2006 and 2009. Although the aim of the Circulars were to provide clarity and correct any ambiguity and misinterpretation with the operation of WHT in Nigeria, its effort to eliminate the controversy on what constitutes “sale in the ordinary course of business” further exacerbated the ambiguity. Taking the 2006 Circular as a case in point, the FIRS modified the provisions of the Regulations to “all types of contract and agency arrangements, other than outright sale and purchase of goods and property in the ordinary course of business”. While the introduction of these additional words by the FIRS may have sought to clarify the issue, it appeared to focus more on qualifying the word “sale”, rather than explaining the Phrase. Furthermore, the FIRS highlighted in the 2006 Circular that where a manufacturer delivers its normal products to its distributors and dealers for sale; and where a distributor earns income from their trading activities, such transactions are sales in the ordinary course of business and are not liable to WHT. In 2009, the FIRS issued another Circular and further attempted to clarify the ambiguity by subjecting “all types of contracts and agency arrangements” to WHT while deleting the ‘sale in the ordinary course of business’ exemption. While the modification in the 2009 Circular appears a quick fix, it is instructive to note that the Nigerian Courts have held that FIRS’ circulars are merely explanatory notes that do not carry the force of law and cannot modify the provisions of an enacted legislation.   Source: Mondaq

The new rules, originally set to come into effect from 1 October 2019 and now deferred for 12 months, mark a complete overhaul of the way VAT is payable on building and construction invoices. Under the domestic reverse charge the customer receiving the service will have to pay the VAT owed straight to HMRC instead of paying the supplier if they report under the Construction Industry Scheme (CIS). Businesses need to adapt their accounting systems for dealing with VAT and there will be a negative impact on the cashflows for many affected businesses, as they will no longer get VAT payments from customers for services where the reverse charge applies. Some 150,000 businesses in the construction and building sector will be affected by the change. Now HMRC has issued a policy brief stating introduction of the new VAT regime will be delayed for a period of 12 months until 1 October 2020. It says this will give businesses more time to prepare and will also avoid the changes coinciding with Brexit. In July, a Federation of Master Builders (FMB) survey of around 8,000 SME construction firm members found that 69% were not aware of reverse charge VAT at all. Of those who were, 67% have not prepared for the changes, and the industry body warned of potential ‘chaos’ when the new regime started. During the twelve months before the charge now comes in, HMRC says it will focus additional resource on identifying and tackling fraud in the construction sector. It will also work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses will be ready for the new implementation date. HRMC also said it recognises that some businesses will have already changed their invoices to meet the needs of the reverse charge and cannot easily change them back in time. Where genuine errors have occurred, HMRC will take into account the fact that the implementation date has changed. Those businesses which have opted for monthly VAT returns ahead of the 1 October 2019 implementation date can reverse this by using the appropriate stagger option on the HMRC website. CIOT welcomed the announcement, saying it would lessen the likely flurry of disputes between suppliers and customers as to whether or not VAT should be charged. Linda Skilbeck, vice-chair of CIOT’s indirect taxes sub-committee, said:  ‘If the government had pressed ahead with a start this October we envisaged significant confusion amongst businesses, leading to disputes between suppliers and customers as to whether or not VAT should be charged. ‘It would have led to an additional influx of calls to HMRC’s phone lines, while HMRC and its call centres were already busy dealing with the implementation of Making Tax Digital, as well as the consequences of Brexit. ‘A start date of October 2020 is more sensible. This should allow time for a dedicated information campaign to be operated by HMRC, with the assistance of industry and professional bodies. Such a campaign could include direct communications with businesses in the sector, particularly those registered for the Construction Industry Scheme, as well as improvements to the content and accessibility of guidance. ’The delay was also welcomed by Mike Cherry, national chairman of the Federation of Small Businesses, who said: ‘With small construction businesses already suffering due to unprecedented uncertainty, slowing growth and rising costs, this was clearly not the right moment to hit them with the reverse charge. ‘Small firms in this sector are already disproportionately impacted by late payments. Roll-out of this change without due care will make a bad situation worse, restricting cashflow and threating the futures of many.  ‘It’s also encouraging to see HMRC providing reassurances that those who’ve already changed invoice arrangements in preparation for the change will not be punished as a result of confusion following this late intervention.’ Alison Horner, indirect tax partner at MHA MacIntyre Hudson, said that while the 12-month delay is a welcome relief, it is frustrating for businesses which spent time and money to properly prepare. ‘The worst affected will be those sub-contractors who moved to monthly returns to get ahead of the changes. These sub-contractors will need to reverse their VAT return accounting dates as soon as possible, which HMRC have said they will facilitate,’ said Horner. ‘By remaining on monthly returns sub-contractors may find they have cash flow problems in funding an unexpected VAT payment to HMRC. They are the only ones who need to take immediate action. The rest can breathe a sigh of relief.’   Source: Investor king