VAT & Nigeria 2025 Tax Reforms: Key changes and implications for businesses

Over three decades after the introduction of Value Added Tax (VAT) in Nigeria, the tax has become one of the government’s most significant non‑oil revenue sources. However, despite the improvement generated since the rate increase from 5% to 7.5% in 2020, persistent structural inefficiencies, compliance challenges, low input VAT recovery, particularly on services and capital expenditure, and long‑standing legal ambiguities have constrained its optimal operation.

Recognising these gaps, the National Assembly has passed two pivotal pieces of legislation — the Nigeria Tax Act (NTA) 2025 and the Nigeria Tax Administration Act (NTAA) 2025 (together, “The Acts”) — which repeal the former VAT Act and introduce a more modernised VAT administration framework. These reforms, effective 1 January 2026, are intended to streamline processes, enhance compliance, strengthen revenue generation, and better align VAT practices with prevailing economic realities.

Key Changes to VAT by the New Acts

1. Retention of the VAT Rate at 7.5%

Although the Presidential Committee on Fiscal Policy & Tax Reforms initially proposed a phased increase to 15% by 2030, consultations with the Nigeria Governors' Forum and other stakeholders resulted in the retention of the existing 7.5% VAT rate. This decision is aimed at balancing the government’s revenue needs with the need to avoid placing additional burdens on businesses and consumers during a period of inflation.

2. VAT payment as a condition for expense deductibility

A major shift introduced under section 21(p) of the NTA is the requirement that VAT must be charged and paid on all taxable supplies before the underlying expense can qualify as allowable for income tax purposes. This rule also applies to imported items, for which the applicable duty or levy must be paid to recognise the expense.

For capital assets, failure to charge VAT, or pay the applicable import duty, renders such assets ineligible as qualifying capital expenditure, preventing businesses from claiming capital allowances. This change strengthens accountability by discouraging practices where companies delay VAT remittances while still benefiting from deductions. The article encourages businesses to self‑charge VAT on all vatable expenses or assets if vendors do not include it.

3. Expansion of input VAT claims to services and fixed assets

The Acts introduce a long‑awaited and fundamental change: input VAT is now claimable on services and fixed assets, provided they are used to make taxable supplies. Examples highlighted in the article include hotels claiming VAT on generator or air‑conditioning repairs, and manufacturers claiming input VAT on engineering consultancy services.

Where a cost relates to both taxable and exempt activities, the input VAT must be apportioned. In addition:

• input VAT can only be claimed on taxable supplies made from 1 January 2026
• claims must be made within five years of the relevant tax period

This expansion encourages investment by allowing businesses to offset a wider range of operational and capital expenses.

4. Fiscalisation and e‑invoicing

The Acts mandate full adoption of the electronic fiscalisation system prescribed by the Service. This system may include approved electronic devices, software solutions or secure data‑transfer systems for recording and reporting taxable supplies.

Non‑compliance attracts significant administrative penalties:

• ₦1,000,000 for the first day that access to deploy technology is denied
• ₦10,000 for each subsequent day
• ₦200,000 for failure to process taxable supplies through the system, plus 100% of the tax due and interest at the prevailing CBN Monetary Policy Rate

To support the transition, the Nigeria Revenue Service has deployed the Merchant Buyer Solution (MBS), a digital e‑invoicing platform aimed at improving transaction reporting and reducing revenue leakages. Migration is phased, beginning with large taxpayers (₦5 billion turnover and above). Enforcement for this category is scheduled between April and June 2026, with timelines for medium and emerging taxpayers to follow.

5. Clearer VAT refund and credit framework

The former VAT framework provided no clearly defined refund mechanism, often making refunds impractical. Under the Acts:

• where input VAT exceeds output VAT, the excess becomes a credit
• unused credits qualify for a refund, provided the taxpayer submits a request within 12 months
• the NRS must process refunds within 30 days
• refunds may be set off against any type of tax liability

Input VAT incurred in making exempt supplies remains non‑claimable.

This reform strengthens cash flow efficiency and reduces working capital pressure, particularly for capital‑intensive businesses. Adequate record‑keeping is essential to benefit from the mechanism.

6. VAT compliance thresholds for small businesses

The Acts define small businesses as those with:

• annual turnover of ₦100 million or less, and
• total fixed assets not exceeding ₦250 million

(excluding providers of professional services).

Such businesses are exempt from VAT registration, charging VAT, filing returns, and remitting VAT. However, they may opt out of this exemption by written notice. When a business exceeds the threshold, VAT compliance becomes mandatory.

Transactions between large companies and exempt small businesses may create complexities, as the larger entity must self‑charge VAT on supplies received. This may influence small businesses to voluntarily opt into the VAT system to maintain smoother transactions.

7. Reclassification of taxable supplies

The Acts introduce updates to VAT classifications:

• Zero‑rated supplies: Essential items such as basic foodstuffs, medical supplies, and educational materials, previously exempt, are now zero‑rated. This maintains price relief while enabling suppliers to claim input VAT.
• Exempt supplies: Purchases made by diplomatic missions, previously zero‑rated, are now VAT‑exempt. Suppliers can no longer recover input VAT on these supplies.
• Airline ticket sales: Commercial airlines registered in Nigeria must now charge VAT on ticket sales.
• VAT‑suspended items: VAT is temporarily suspended on select items including petroleum products, renewable energy equipment, CNG, LPG, and other gaseous hydrocarbons. VAT will apply at a later date determined by the Minister of Finance.

8. VAT revenue distribution

Although the federal‑state‑local sharing ratio remains unchanged (15% / 50% / 35%), the distribution formula for states has been amended to:

• 50% equality
• 30% consumption
• 20% population

Taxpayers are required to disclose state‑level consumption data in their VAT returns. Failure to comply attracts a penalty of ₦1,000,000.

Conclusion

Nigeria’s VAT reforms signal a major shift toward a more digitalised, transparent, and equitable tax system. As implementation approaches, businesses must understand the new provisions, strengthen internal compliance processes, maintain robust documentation, and integrate with the required fiscal systems. Close attention to forthcoming administrative guidelines will be essential to ensuring compliance and leveraging available benefits.

Download the full article to explore the detailed provisions and understand their implications for your business.

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Authors

Ajibola Sogunro, Partner, Tax & regulatory services and Olamide Sulaiman, Consultant, Tax & regulatory services