What is the LIRS Power of Substitution?
The Power of Substitution is a legal enforcement mechanism under Section 38 of the Lagos State Revenue Administration Law 2006 that allows LIRS to recover unpaid taxes by issuing demand notices to a taxpayer's debtors (clients, banks, customers) to pay directly to LIRS instead of to the taxpayer.
Source: Lagos State Revenue Administration Law 2006 • Last verified: January 2026
In This Article
Who Does This Affect?
The Power of Substitution can be exercised against any taxpayer with outstanding tax obligations in Lagos State. This includes:
🏢 Employers
Who haven't remitted PAYE (Pay As You Earn) deductions from employee salaries
💼 Businesses
That collected but didn't remit Withholding Tax (WHT) on payments to contractors
🏠 Property Owners
With unpaid Land Use Charges or property-related taxes
⚠️ Freelancers & Creators
Who invoice clients and haven't filed personal income taxes—your clients could receive LIRS notices
⚠️ Important for Freelancers
If you're a Lagos-based freelancer or content creator who invoices clients, and you haven't been filing your taxes, LIRS can issue a demand notice to your clients to pay your taxes directly to LIRS.
How Does the Power of Substitution Work?
Here's the step-by-step process of how LIRS exercises the Power of Substitution:
1
LIRS Identifies Defaulters
LIRS reviews tax records and identifies taxpayers with outstanding obligations (unremitted PAYE, WHT, or other taxes).
2
Third Parties Are Identified
LIRS identifies third parties (clients, banks, customers) who owe money to the defaulting taxpayer.
3
Demand Notice Issued
LIRS issues a formal demand notice to the third party, requiring them to pay the outstanding taxes directly to LIRS.
4
Third Party Must Comply
The third party is legally obligated to pay LIRS or face penalties themselves. They cannot refuse.
5
Debt Considered Settled
Payment to LIRS counts as payment of the third party's debt to the taxpayer. If your client pays ₦500,000 to LIRS, they no longer owe you that money.
What Triggers an LIRS Power of Substitution Notice?
LIRS typically exercises the Power of Substitution when there are significant outstanding tax obligations. Common triggers include:
📋
Outstanding PAYE
Employers who deducted but didn't remit employee taxes
💰
Unremitted WHT
Businesses that collected 5-10% WHT but didn't pay LIRS
🏪
Business Premises Levy
Unpaid annual business registration fees
🏠
Land Use Charges
Accumulated property-related tax obligations
📊
Failed Audit Assessments
Unpaid taxes discovered during LIRS audits
👤
Personal Income Tax
Self-employed individuals who haven't filed
What Happens If You Ignore It?
⚠️ Penalties for Non-Compliance
💸
Criminal Fine
₦500,000
Or 3 years imprisonment
📈
Interest on Unpaid Taxes
21% per annum
Compounds until paid
➕
Additional Penalty
10% of outstanding tax
Added to total owed
For Third Parties Who Refuse to Comply:
If a client or bank receives a Power of Substitution notice and refuses to pay, they become jointly liable for the outstanding taxes plus penalties. This makes compliance virtually mandatory.
How to Avoid Getting a Power of Substitution Notice
Prevention is always better than cure. Here's how to stay compliant and avoid ever receiving a Power of Substitution notice:
✓
Track All Your Income
Use KeepAm to automatically track and categorize your income throughout the year
✓
Calculate Your Tax Obligations Regularly
Don't wait until filing season. Know your tax position monthly with our free tax calculator
✓
File on Time (March 31 Deadline)
The annual filing deadline for personal income tax is March 31. Don't miss it.
✓
Keep Records for 6 Years
LIRS can audit you for up to 6 years back. Maintain complete records of all income and expenses
✓
Remit PAYE Monthly (If You Have Employees)
PAYE must be remitted by the 10th of the following month. Set up automatic reminders.
Not sure if you're at risk?
Use our free tax calculator to check your tax position in 2 minutes
What to Do If You Receive a Power of Substitution Notice
If you receive a Power of Substitution notice (or hear that your client received one about you), follow these steps immediately:
1
Don't Panic — Verify First
Confirm the notice is genuine by contacting LIRS directly. Scammers sometimes send fake notices.
2
Contact LIRS Immediately
Visit the LIRS office listed on the notice or call their helpline. Don't ignore it.
3
Gather Your Records
Collect all tax payment receipts, bank statements showing remittances, and filing evidence.
4
Consider Professional Help
For amounts over ₦1 million, engage a tax consultant or accountant to negotiate on your behalf.
5
Negotiate a Payment Plan
If you can't pay the full amount, LIRS may agree to a structured payment plan. This is better than enforcement.
How This Affects Freelancers and Content Creators
🎯 Why Freelancers Should Pay Attention
Unlike salaried employees whose employers handle PAYE, freelancers and content creators are responsible for their own tax filings. If you've been earning income but not filing taxes, you're at risk.
📱 Content Creators at Risk
• YouTube AdSense payments
• TikTok Creator Fund earnings
• Instagram/Facebook sponsorships
• Brand partnership payments
• Affiliate marketing commissions
If LIRS traces these payments and you haven't filed, the platforms or brands could receive demand notices.
💼 Freelancers at Risk
• Consulting and advisory fees
• Design, development, writing gigs
• Remote work for Nigerian companies
• Contract work invoices
• Agency and retainer arrangements
Your clients could be instructed to pay your invoices directly to LIRS instead of to you.
Protect Your Business Relationships
Don't let your clients receive embarrassing LIRS notices. Stay compliant with KeepAm.
Frequently Asked Questions
Can LIRS really contact my clients directly?
Yes. Under Section 38 of the Lagos State Revenue Administration Law 2006, LIRS is legally empowered to issue demand notices to any third party who owes money to a tax defaulter. This includes clients, customers, banks, and business partners.
What if I've already paid my taxes?
Provide proof of payment immediately to LIRS. Bring your tax payment receipts, bank statements showing remittances, and TCC (Tax Clearance Certificate) if you have one. If there's been an error, LIRS will withdraw the notice.
Can I dispute a Power of Substitution notice?
Yes, you have 30 days to dispute the notice by filing an objection with LIRS. You'll need to provide evidence that the tax has been paid or that the assessment is incorrect. During the dispute period, enforcement may be paused.
What if my client pays LIRS on my behalf?
If your client pays LIRS in response to a demand notice, that payment settles their debt to you. For example, if a client owes you ₦500,000 and pays that amount to LIRS, they no longer owe you that money—it's considered payment of your tax liability.
Does the Power of Substitution apply to freelancers?
Yes. If you're a freelancer who earns income in Lagos State and hasn't been filing taxes, LIRS can trace your income sources and issue demand notices to your clients. This makes it critical for freelancers to track income and file taxes on time.
How do I know my current tax status?
Use KeepAm's free tax calculator to estimate your tax obligations based on your income. For official status, visit LIRS with your TIN or apply for a Tax Clearance Certificate (TCC).
What is Section 38 of the Lagos State Revenue Administration Law?
Section 38 of the Lagos State Revenue Administration Law 2006 grants LIRS the power to recover unpaid taxes by serving demand notices to third parties who owe money to the defaulting taxpayer. It's the legal foundation for the Power of Substitution mechanism.
Don't Wait for LIRS to Contact Your Clients
Stay compliant, protect your business relationships, and know your tax position with KeepAm. Track income, calculate taxes, and file with confidence.
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Sources & References
Lagos State Revenue Administration Law 2006, Section 38
Lagos State Internal Revenue Service (LIRS) Official Guidelines
Nigeria Tax Act 2025, as amended
Information verified: January 25, 2026 • This article is for informational purposes only and does not constitute legal or tax advice.
KeepAm Team
Tax compliance and financial guidance for Nigerian entrepreneurs.
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