Recently, the Tax Appeal Tribunal (TAT) sitting in Lagos held that the lease of real property (commercial and residential) does not constitute a supply of goods and services for Value Added Tax (VAT) purposes. This decision was made in the case of Ess-Ay Holdings Limited v. FIRS.
The TAT in Lagos based its decision on the firm view that: (i) real property is not severable or moveable and does not qualify as goods; (ii) a lease does not qualify as service as the landlord only transfers a right in the property to the tenant; and (iii) the FIRS Information Circular on VAT Exempt Items cannot validly imply that VAT should be charged on rent obtained from leases of commercial property when the VAT Act does not so provide.
A day prior to the judgement above, the TAT sitting in Benin held in the case of Chief J.W. Ellah, Sons & Company Ltd. v. FIRS that (i) the definitions of ‘supplies’ ‘supply of goods’ and ‘supply of services’ in the VAT Act; (ii) the case of FBIR v. Ibile Holdings; and (iii) the FIRS’ Information Circular on VAT Exempt Items all evince the fact that the lease of commercial properties are VATable. The TAT in Benin thus held that the FIRS is right to demand for VAT on the commercial buildings of Chief Ellah Ltd which were rented to tenants.
While the Ess-Ay Ltd judgement bodes well for taxpayers, the Chief Ellah Ltd judgment supports the position of the FIRS. Given that the TAT of both zones are of concurrent jurisdiction, the judgements of the TAT rank equally and only the Federal High Court can make a decisive ruling on appeal.
Ess-Ay Holdings Limited v FIRS
- Ess-Aay Holdings (Ess-Ay) is in the business of developing real properties which it rents to tenants for commercial and residential purposes. The FIRS assessed Ess-Ay to VAT in the sum of ₦54,263,899.50 on its leases of properties for the 2014 – 2016 accounting years. After the FIRS issued a Notice of Refusal to Amend its assessment, Ess-Ay instituted the appeal at the TAT.
- In arguing the first issue on whether rental incomes should be subject to VAT, the FIRS submitted that the development of land into habitable and commercial properties by Ess-Ay is a value added to the land and that the lease of the taxable development on the land is a ‘supply of goods’ in accordance with Sections 2, 3 and 46 of the VAT Act.
- The FIRS further explained that lease of residential property is not subject to VAT because the VAT Order and the FIRS information Circular 9701 both seek to exempt lease of residential accommodation. These, according to the FIRS have sufficiently shown the intention that VAT should be charged on the lease of commercial property.
- Counsel for Ess-Ay on the other hand was of the view that VAT is not chargeable on the rent paid by a tenant irrespective of the property involved (whether residential or commercial) as this was not provided for in the First schedule to the VAT Act. He argued that tax cannot be validly charged unless expressly provided for by a taxing statute.
- The TAT in Lagos held that: (i) a lease is not a good or service as a good must be moveable and when on land, must be severable from the land; (ii) a landlord only transfers interest in the leased property but does not render a service by leasing his property to the tenant; (iii) a building cannot be regarded as an intangible commodity or a supply of goods; and (iv) the right granted to the tenant in the property is an incorporeal right.
- The TAT also held that the FIRS Information Circular 9701 which seeks to exempt lease of residential accommodation from VAT and impliedly subject commercial leases to VAT is a mere administrative document giving information/opinion to the general public with no legally binding effect.
- The TAT finally stated that the FIRS’ Circular cannot modify the provisions of the VAT Act nor vary the list of exempted items under the First Schedule to the VAT Act. It also cannot be a basis for charging transactions to VAT where the VAT Act does not so charge.
- In making the ruling above, the TAT relied on CNOOC Exploration and Production Nigeria Limited vs Attorney General of the Federation and Ors’, the Black’s Law Dictionary and the Sale of Goods Act 1893.
Chief Ellah, Sons & Company v. FIRS
- With facts similar to the case above, Chief Ellah Ltd. in the business of leasing and maintenance of houses and properties appealed to the TAT in Benin on various grounds for different taxes. One of the grounds related to the FIRS unlawfully and erroneously assessing it to VAT on its leases of premises for commercial purposes.
- The TAT held that (i) the definitions of ‘supplies’ ‘supply of goods’ and ‘supply of services’ in the VAT Act; (ii) the case of FBIR v. Ibile Holdings; and (iii) the FIRS’ Information Circular on VAT Exempt Items all evince the fact that the lease of commercial properties are VATable. The TAT in Benin thus held that the FIRS is right to demand for VAT on the commercial buildings of Chief Ellah Ltd which were rented to tenants.
Myriad decided cases align with the view that a lease in property is an interest in land. The exclusion of ‘interest in land’ from the definition of ‘goods’ by the VAT Act as amended by the Finance Act brings to rest the argument as to whether or not leases should be subject to VAT. The pronunciation of the TAT in Ess-Ay v FIRS above that a leasehold right is an incorporeal right may not totally give as the definition of ‘goods’ in the VAT Act as amended now defines incorporeal/intangible rights as taxable goods for VAT purposes. This definition however excludes excluding interest in land which leases fall under.
Curiously, the TAT also commented about the legality of the VAT Modification Order which was made by the Minister of Finance to amend the VAT Act. According to the TAT, only the National Assembly can constitutionally amended its statute. Though this was not put in issue by the parties to the case at hand, it is expected that persons whom the provisions of the Order do not favour would explore the option of challenging its constitutionality in due course.
For the moment however, taxpayers are enjoined to seek requisite clarification from trusted advisers given the opposing effects of the conflicting TAT judgements on applicability of VAT to lease.