September 29, 2020
The applicability of Value Added Tax (VAT) to rental income derived from property leases in Nigeria has been the subject of controversy. This stems from the uncertainty as to whether leases, in the first place, constitute “supply of goods and services”, and more recently, whether leases, which confer a right to use real property, can be regarded as ‘interest in land’, based on the amendments introduced by the Finance Act, 2019 (Finance Act).
Prior to the enactment of the Finance Act, the Federal Inland Revenue Service (“FIRS”) and taxpayers have on different occasions, approached the Tax Appeal Tribunal (“TAT” or “the Tribunal”) to determine the applicability of VAT to rental income. However, the Tribunal in two different Zones delivered conflicting decisions on the issue, which have generated mixed reactions amongst taxpayers, tax practitioners and other stakeholders.
This is understandable, as the VAT Act, prior to the amendments introduced by the Finance Act did not define the terms “goods” and “services”. While the Finance Act now clearly defines goods to exclude interest in land, this definition of “goods” still leaves room for doubt concerning whether the lease of a property can be effectively categorized as a transaction involving “interest in land” for the purpose of VAT exemption.
This article seeks to discuss the developments in the Nigerian tax space with respect to the application of VAT on leases in Nigeria, including varying interpretations by the FIRS and conflicting decisions of the TAT on the issue. Further, the article will examine the practice in other jurisdictions with regard to the applicability of VAT to rental income and whether the Finance Act has indeed laid the matter to rest or not.
Position of the Law Pre-Finance Act 2019
Before the enactment of the Finance Act, 2019, VAT was charged and payable on the supply of all goods and services, other than those specifically exempted in the first schedule to the VAT Act. The question of whether VAT was applicable on lease transactions revolved around the proper classification of a lease transaction as either a supply of goods or services for the purpose of VAT. The VAT Act prior to the Finance Act was not very helpful in this regard, as it did not define “goods” or “service” to aid effective classification. Thus, the issue was left open to subjective interpretation by tax officials and taxpayers. While some held the view that a lease transaction is at best a transfer of incorporeal rights which does not fall within the purview of the VAT Act, others were of the view that leases fall within the purview of the VAT Act and should be subject to VAT.
Interestingly the FIRS in its 1997 Circular titled “Detailed List of Items Exempted from Value Added Tax (VAT)” (FIRS Circular No. 9701) clearly listed “House Rent on Residential Accommodation” as exempt from VAT. Based on this, FIRS held the view that the express mention of residential leases as VAT exempt in the Circular impliedly meant that commercial leases are subject to VAT in Nigeria. However, the courts have severally held that FIRS circulars and notices are the mere opinions of the agency on the provisions of the tax laws and taxpayers dissatisfied with FIRS’ position have successfully challenged this position as discussed below.