As of January
2026, the Lagos State Internal Revenue Service (LIRS) has begun enforcing the “Power
of Substitution” under the Nigeria Tax Administration Act
(NTAA), 2025. This provision allows the state to recover unpaid taxes directly
from third parties—such as banks, employers, tenants, and business partners—who
hold or owe money to a tax defaulter.
If
you’ve been tracking changes to your finances this month, you’ll know that
January 1, 2026 marked a major reset in Nigeria’s tax framework with the
commencement of the Nigeria Tax Act and the Nigeria Tax Administration Act.
While those laws were designed to streamline tax administration nationwide,
Lagos State is now making its enforcement position unmistakably clear.
On January 21, 2026, the Executive Chairman of the LIRS, Ayodele
Subair, issued a public notice announcing the activation of the
state’s Power of Substitution.
In the notice, the LIRS stated that the law:
“…empowers the Lagos State Internal Revenue Service to
direct any person holding money on behalf of, or owing money to, a taxpayer who
has failed to pay an established final tax liability when due, to remit such
money to the Service in settlement (or partial settlement) of the outstanding
tax.”
In simple terms, if there is an established and
unpaid tax liability attached to your name, the government now
has a direct and legally backed way to recover it.
What Exactly Is the
“Power of Substitution”?
Think of it as a shortcut for tax recovery.
Under the NTAA 2025, the LIRS does not have to wait for a
defaulting taxpayer to voluntarily pay once a tax assessment has become final.
Instead, it can legally appoint a third party—such as a bank or employer—to
settle the debt using funds that would otherwise be paid to the taxpayer.
This mechanism applies to taxes such as Personal
Income Tax, Capital Gains Tax, and Stamp Duties, among others.
Who Can Be Required to
“Pay on Your Behalf”?
According to the LIRS, a substitution notice may be issued
to any
person or entity holding money for, or owing money to, a tax defaulter.
This includes:
·
Your bank: Funds can be remitted
directly from your account balance.
·
Your employer: Salary payments may be
redirected to settle outstanding tax liabilities.
·
Your tenants: Rent payments can be
required to go to the LIRS instead of your account.
·
Your business partners
or customers:
Anyone who owes you money may be instructed to pay the LIRS first.
What This Means for
9-5ers and Small Business Owners
The objective is straightforward: where a final tax
liability exists, the LIRS can bypass delays and recover taxes from the source
of your funds.
For employees (9-5ers):
Your employer is often the first point of substitution. If you owe Personal
Income Tax, the LIRS can direct your HR or Finance department to deduct and
remit the outstanding amount from your salary. Under the NTAA 2025, employers
are statutorily
required to comply. In practical terms, your take-home pay may
be reduced until the liability is cleared.
For small business
owners and entrepreneurs:
This is where things become more sensitive. The LIRS can issue substitution
notices to customers, tenants, or business partners. A client who has just
received your invoice could receive a directive to pay the LIRS instead. While
this ensures tax recovery for the state, it also means business owners must
keep their tax affairs up to date to avoid awkward and potentially reputation-damaging
situations.
The shared reality:
your bank account
Regardless of whether you are an employee or a business owner, your bank
account is the most direct target. Once served with a substitution notice,
banks are required to remit the specified amounts without delay
and report available balances through the LIRS e-Tax platform.
Key Compliance Rules You
Should Know
Once a substitution notice is issued, compliance is not
optional.
·
Direct remittance: Funds must be paid
straight to the LIRS and confirmed via the e-Tax
platform.
·
Legal consequences: Failure by a bank,
employer, or third party to comply constitutes an offence under the Act.
·
Right to object: Taxpayers still retain
the right to object to an assessment. You have 30 days
from receiving a notice to submit a written objection.