Personal Income Tax Act: What Lawyers Need To Know And The Application Of Value Added Tax To Professional Charges By Chukwuka Ikwuazom

The tax is imposed by the Personal Income Tax Act 2004 [amended in 2011 and 2012] which also regulates the administration.

Personal Income Tax as Distinct from other Income Taxes Companies Income Tax-Chargeable on the profit of a company The rate is 30% of the chargeable profit of a company. It is imposed by the Companies Income Tax Act.  Petroleum Profit Tax-This is chargeable on the profit of companies operating in the petroleum upstream sector . It is imposed by the Petroleum Profit Tax Act Who is Liable to pay personal Income Tax Individuals Itinerant worker: An individual who works during a year of assessment (other than as a member of the armed forces) for wages, salaries or livelihood in more than one state for a minimum of twenty (20) days in at least three (3) months of every assessment year Community Families Trustees Applicabilty to Lawyers Lawyers can practice either as a partnership, sole proprietor or under an employment. Partnership– Partnership is not taxed at the entity level because the partners are not distinct from the partnership. The tax is imposed on the income due to the partners. Sole Proprietor – Imposed on the profit derived from practice of the sole proprietor. It is the individual that is taxed and not the practice since there is no distinction between the business and the individual Employment –Imposed on the gross emoluments of the lawyer Chargeable Income Sole Proprietorship / Partnership Gain or profit, from any trade, business, profession or vocation, for whatever period of time such trade, business, profession or vocation may have been carried out. Ascertainment of  Tax Liability- Sole Proprietor / partnership All outgoing and expenses or other expenses that are wholly, exclusively, necessarily andreasonable incurred during that period in the production of the income are allowable deductions s. 20 PITA The allowable deductions include: Interest on principal employed as capital in producing the income Interest on loan for developing owner-occupied residential house Rents for premises occupied for the purpose of producing the income Allowable Deductions  Expenses incurred for repairs of premises deployed for producing the profit Bad debts proven to have become bad during the assessment period Contribution to a pension fund or contributions to other retirement benefits fund or scheme approved by the Board Expenses incurred for research and proved to the satisfaction of the tax authorities Treatment of Losses Losses made during the year of assessment are an allowable deduction Provided they are claimed in writing within 12 months after the end of year of assessment The loss which the tax authority is satisfied was incurred during any year preceding the year of assessment and which has not been allowed against the assessable income of the preceding year If the expenses for land and building let for the purpose of generating income exceed the income the excess shall be treated as a loss. Ascertainment of Tax Liability The following deductions are tax exempt for the purpose of computing tax liability: National Housing Fund Contribution National Health Insurance Scheme Life Assurance Premium National Pension Scheme Gratuities See Sixth Schedule to PITA Rate of Income Tax The amount payable is determined from the Table Set out in the Sixth Schedule The Schedule provides for a graduated tax rate with minimum tax pegged at one percent of the gross income. • Minimum tax is applicable if after all deductions, an individual has no chargeable income or where the tax payable on the chargeable income of an individual is less than one percent of the total income of that individual – Section 37 PITA After relief allowance and Next ₦500,000 at 19%exemptions have been made, Next ₦1,600,000 at 21%the balance is taxed as follows: Above ₦3,200,000 at 24% First ₦300,000 at 7% Next ₦300,000 at 11% Next ₦500,000 at 15% Chargeable Income of Employees Employment Any salary, wage, fee, allowance, or other gain or profit from employment including compensations, bonuses, premiums, benefits or other perquisites allowed. Ascertainment of Tax Liability– Employment Tax Exempt deductions. National Housing Fund Contribution National Health Insurance Scheme Life Assurance Premium National Pension Scheme Gratuities The assessable income is the employee’s gross emolument. There is a consolidated relief allowance of ₦200,000 or 1% of gross income whichever is higher plus twenty percent of gross income. Tax Rate – Employment After relief allowance and ØNext ₦500,000 at 19%exemptions have been made, Next ₦1,600,000 at 21% the balance is taxed as follows: Above ₦3,200,000 at 24% First ₦300,000 at 7% Next ₦300,000 at 11% Next ₦500,000 at 15% Self Assessment File without demand and within 90 days of the commencement of every  year of assessment a return of income in the prescribed form containing the following:

•  Amount of income from every source of the year preceding the  year of assessment

Other particulars as may be required with respect to such income, allowance reliefs deduction.

•  Declaration that the contents are accurate
• Self calculate the tax payable

Withholding tax A mechanism for tax collection. In principle, it is a payment for the ultimate income tax liability of the taxpayer. Essentially an advance payment of income tax. It entitles the recipients of such income to claim a tax credit or a tax relief against such recipient’s final/total tax obligations for the relevant tax year. The law mandates individuals to deduct and withhold tax from payment due to a taxpayer and remit to the tax authorities. Payment Deduction Rent 5% Interest 10% Royalty 5% Dividends 10% Director’s fees 10% P.A.Y.E – Lawyers under Employment See s. 81 PITA Mandates employers to deduct from every emolument made to an employee. This is a form of withholding tax The employer shall also file a return of all emoluments paid to all employees not later than 31 January of every year for all employees in its employment in the preceding year. Penalty of N500,000 for a corporate body and N50,000 for individuals who breach this provision Duty to Maintain Records /Presumptive Tax Duty to keep proper books of account that are adequate for tax purposes. If for all practical purposes, the tax payable cannot be ascertained or records are not kept for proper assessment of tax payable, the tax payer  would be taxed under a Guideline to be issued by the minister under a presumptive tax regime. Collecting Authority Every individual, corporation sole or body of individuals other than persons employed in the armed forces, officers of Nigerian Foreign Service, resident of the Federal Capital Territory, persons who derive income or profit outside Nigeria are liable to pay tax in their state of residence. The “exempted” persons above pay to the Federal Inland Revenue Service ( “FIRS”) Enforcement Powers to enter and search premises. Upon reasonable suspicion of non-disclosure or irregularity and the evidence of such irregularity can be found in the business premises. Assessment by Tax Authorities Can accept the returns and make an assessment accordingly Can refuse the returns and issue assessment on BoJ Issue assessment on BoJ for individuals who fail to make returns Distrain goods and chattels of the defaulting taxpayer What is Value Added Tax Value Added Tax (“VAT”) is a tax on the supply of goods and services. Essentially, it is a consumption tax borne by the final consumer of the goods or services. VAT is based on the increase in value of a product or service at each stage of production or distribution. It is a compensation for the shared services and infrastructure provided by the state and funded by its taxpayers that were used in enhancing that product or service. Value Added Tax in Nigeria Value Added Tax Act, Cap. V1, Laws of the Federation of Nigeria, 2004 (as amended by the VAT (Amendment) Act, 2007). (“VATA”) imposes VAT on all taxable goods and services. VAT is administered by the FIRS. Taxable goods and services are all goods and services except goods and services exempted. The list of exempted items are in the First Schedule to the VATA. VAT Exempt Goods and Services Goods exempted

•  All medical and pharmaceutical products
• All exports excluding non oil products exports which are zero exempt
•  Basic food items
• Plant machinery and equipment imported for use in EPZ or FTZ
•  Books and educational materials
• Commissions earned on stock
• Baby products exchange transactions
•  Fertilizer and locally manufactured farm machinery and veterinary
• Plant, machinery and equipment by educational institutions as part of purchased for gas utilization in the learning downstream sector
• All exported services
• Agricultural equipment and Zero rated goods/implements
•  Non-oil exports
• Services exempted  Goods and services purchased by Medical services and diplomats
• Services rendered by community
• Goods purchased for use in banks, people’s banks and mortgage humanitarian donor funded projects institutions
•  Plays and performances conducted

Application of VAT to Professional Charges Legal service is not exempted therefore subject to VAT. Exported legal service is not liable to VAT VAT is chargeable at the rate of 5% of the of the value of the professional fees. Expenses are not subject to VAT. Registration /payment & Collection of VAT A lawyer is mandated to register with the FIRS within six months of commencement of business. – s 8 (1) Penalty for Failure to register is N10,000 for the first month of default and N5,000 for subsequent months of default. – s. 8(2) A lawyer is liable to pay VAT for goods and services supplied to him (input tax) A lawyer shall collect VAT on services supplied to clients (output tax) -s. Failure to collect attracts a penalty of 150% of the amount not collected plus 5% interest above the CBN rediscount rate –s 34 Calculation of VAT for Professional Service Assuming the professional fees is N1,000,000 and expenses is N200,000 The VAT chargeable is 5% of N1,000,000 = N50,000 Amount to be billed to client = N1,000,000,+ N200,000+ N50,000 N50,000 is the VAT chargeable. Expenses Expenses are disbursements made on behalf of a client. It does not constitute value added, so not subject to VAT. It is important for expenses to be separated from the professional fees while invoicing clients. Accounts / Returns to the FIRS Keep record of transactions relating to the services rendered which are sufficient to determine the right of amount of tax. s. 12. Penalty of N2,000 for every month of default. Render returns on or before the 30th day of the month following that in which the supply or purchase was made of all taxable goods and services purchased or supplied by him in the preceding month. s.15 Failure to render returns will render the taxpayer to BoJ assessment- s.18. There is also a penalty of N5,000 for every month of default. s. 35 Remission of VAT to FIRS If the output tax exceeds the input tax, the excess is remitted to the FIRS, where the input tax exceeds the output tax, the lawyer is entitled to a refund of the excess from the FIRS on production of documents as FIRS may require. Note: input tax paid on overhead, service and general administration which otherwise can be expended through the profit and loss account and input tax on capital items and asset  capitalized with a cost of the capital items and assets are not allowed as a deduction from output tax. Failure to Remit VAT/ Tax Evasion Failure to remit within the time specified attracts additional penalty of a sum equal to 5% per annum of the tax remittable plus interest at the commercial rate. Evasion of tax is punishable with a fine of N30,000 or two times the amount of tax being evaded whichever greater or imprisonment for term not exceeding three years. Failure to notify FIRS of Change of address within one month of such change attracts s penalty of N5,000. Other Penalties Failure to issue invoice for services supplied by a lawyer renders him liable on conviction to a fine of 50% of the cost of the service. Failure to register can also lead to sealing up the place of business Mr Ikwuazom is Partner/ Head of Tax Practice, Aluko & Oyebode.]]>