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On Thursday, 10 September 2020, the Tax Appeal Tribunal (“TAT”), Lagos Division delivered a judgment in a matter between Ess-ay Holdings Limited (“the Appellant”) and the Federal Inland Revenue Service (“FIRS” or “the Respondent”).

The matter bordered on the applicability of Value Added Tax (VAT) on rental income and whether the lease of a real property constitute a supply of goods or service, regardless of whether they are for commercial or residential purpose. The case also evaluated the validity of FIRS information circular subjecting lease of Commercial Property to VAT.

Highlights of the Case

The Appellant invests and engages in the development of real properties which are rented or leased to tenants for both commercial and residential purposes, in return for rental income. Following a tax audit carried out by FIRS, the rental income earned by the Appellant from its commercial tenants for 2014 to 2016 was subjected to VAT. The Appellant objected and filed an appeal against the FIRS’ decision refusing to amend the assessments in respect of the alleged tax liability for the 2014 – 2016 accounting years.

The Appellant alleged as follows:

i. FIRS subjecting its rental income to VAT is unlawful as it contradicts the provisions of the VAT Act Cap V1, LFN 2004 (VAT ACT).

ii. VAT is not a tax on returns on investments, such as rent, dividend and interest. Likewise, rental income is not derived from supply of goods and services.

iii. The VAT Act did not differentiate between commercial rental income and residential rental income, therefore, such distinction is illegal, null and void.

iv. An information circular cannot override or alter the provisions of the VAT Act.

On the other hand, FIRS argued that its information circular No. 9701 dated 1st January 1997 remains valid and rentals on commercial and residential real properties is vatable by the combined reading of sections 2 and 46 of the VAT Act, as it amounts to supply of goods. However, residential lease or tenancy is exempted under the VAT Act (Modification) Order of 2018.

The TAT held that:

i. VAT is charged and payable on transactions and not on the consideration paid on the transaction. Consideration is only relevant to determine the amount to be paid as VAT.

ii. Due to the nature of real properties, they are not moveable and therefore cannot be classified as goods.

iii. Transfer of interest in real properties does not amount to rendering of service. A lessor or a landlord in a lease or tenancy arrangement is not rendering any service to the lessee/tenant, he only transfers his right to the exclusive possession of the property, for a defined period of time.

iv. Lease of real properties whether for commercial or residential purpose, does not amount to supply of goods or services. This is simply a transfer of incorporeal property right to the tenant and therefore not liable to VAT. This decision was supported with the earlier judgement on CNOOC vs FIRS on a similar matter.

v. Information Circular does not constitute a regulation within the meaning of the VAT Act. Amendment to the Schedule of the VAT Act cannot be done through an information circular, it must be by way of Regulations made by the appropriate authority, in this case, the Minister for Finance.

vi. However, the decision of the Federal High Court in Registered Trustees of Hotel Owners and Managers Association of Lagos (HOMAL) Vs AG Federation is valid. The Tribunal reiterated that the National Assembly cannot donate its power of legislation to anybody, not even its own Committee, and section 1(2) of the Taxes and Levies (Approved List for Collection) Act (similar to section 38 of the VAT Act) which gave the Minister of Finance the power to amend the Act is in breach of the doctrine of separation of powers and therefore null and void.

Our Thoughts

Value Added Tax is chargeable on supply of goods and services other than those listed in the first schedule to the VAT Act. The Act defines supply of goods or service but is silent on what constitutes goods or services. This has resulted in the evident ambiguity in this case.

While there may be divergent opinions regarding this judgement, we agree with the reasoning of the TAT that rental of real properties whether for commercial or residential purpose does not amount to supply of goods or services (but can be deemed to be incorporeal property right), especially as there was no clear definition in the VAT Act on what constitute goods and services, prior to the 2019 Finance Act. Tax laws should be unambiguous and clear to all parties.

This gap has however been made good by the Finance Act, which amended the VAT Act. The definition of goods has now included any intangible product, asset or property over which a person has ownership or rights, or from which he derives benefits, and which can be transferred from one person to another excluding interest in land. Going by this definition, transfer of rights or interest in incorporeal properties now fall within the definition of goods and therefore liable to VAT at the appropriate rate.

Notwithstanding the outcome of this judgement, tax payers, especially those involved in the business of renting or leasing of real properties, should note that, even though this decision seems favorable, it will however not hold water going forward, given the new definition of “goods” in the VAT Act as amended by the Finance Act 2019, which became effective in February 2020.

Also noteworthy is the contradicting decision of the Tribunal sitting in Benin in the case of Chief JW Ellah, Sons & Company Ltd. V FIRS (Chief JW Ellah case). The Tribunal in JW Ellah case made a distinction between commercial and residential buildings, and held that a charge, fee, rent or any other consideration payable on commercial buildings are subject to VAT, whereas charge, fee, rent or any other consideration payable on domestic or residential building are not VATable. Given that the TAT in Chief Ellah case and the case under review are of concurrent jurisdiction, the two decisions remain valid until a decision from a court of higher jurisdiction and the controversial issue of VAT on rental income from real property may subsist.

We do expect that FIRS will appeal this judgement and whatever is the outcome of such appeal will only have effect on periods before February 2020. In the event that subsequent appeals end in the taxpayer’s favour, it may also be impracticable to seek refund for VAT already paid to FIRS on rental income for previous years.