The Tax Appeal Tribunal (TAT) recently made pronouncements on whether rental income from landed properties is subject to VAT under the VAT legal regime in Nigeria. In the case of Ellah v. FIRS [Appeal No.: TAT/SSZ/001/2019], an appeal arose as a result of a lumped-up tax assessment issued by FIRS to the Appellant for several taxes, including VAT. Judgment in this lawsuit was delivered on 9 September 2020, by the South-South Division of the TAT sitting in Benin and the TAT held as follows:

“the consideration is payable is subject to VAT whereas domestic or commercial buildings where a charge, fee or rent or any other residential building, in our opinion, are not VATable.”

The Tribunal arrived at its decision by relying on the definition of “supply of goods” in the VAT Act, which classified the “letting out of goods on hire or leasing” as the supply of goods. This decision implies that the Tribunal considered a landed property as a “goodȋ, although the Tribunal conceded that the FIRS Circular No. 9701 of 1 January 1997 which purported to amend a schedule of the VAT Act, could not take the place of the law.

Interestingly, the Lagos Zone of the TAT delivered a contrary decision in the case of Ess-ay Holdings Limited v. FIRS [Appeal No.: TAT/LZ/VAT/029/2019] on 10 September 2020— twenty-four hours after the South-South Zone handed down its decision in Ella’s case. In this case, Ess-ay Holdings Limited, a real estate company, challenged the VAT assessment, which was issued by FIRS on the rental income from its commercial properties. The Lagos Zone of the TAT, however, agreed with Ess-ay Holdingsȇ argument and held that:

the commercial bXildingV Zhere a charge, fee or renW or an\ oWher consideration is payable is subject to VAT whereas domestic or residential building, in our opinion, are not VATable.

The Tribunal arrived at its decision by relying on the definition of “supply of goods” in the VAT Act, which classified the “letting out of goods on hire or leasing” as the supply of goods. This decision implies that the Tribunal considered a landed property as a “goodȋ, although the Tribunal conceded that the FIRS Circular No. 9701 of 1 January 1997 which purported to amend a schedule of the VAT Act, could not take the place of the law.

Interestingly, the Lagos Zone of the TAT delivered a contrary decision in the case of Ess-ay Holdings Limited v. FIRS [Appeal No.: TAT/LZ/VAT/029/2019] on 10 September 2020— twenty-four hours after the South-South Zone handed down its decision in Ella’s case. In this case, Ess-ay Holdings Limited, a real estate company, challenged the VAT assessment, which was issued by FIRS on the rental income from its commercial properties. The Lagos Zone of the TAT, however, agreed with Ess-ay Holdingsȇ argument and held that:

Rent derived from the lease of real properties whether for residential or commercial purpose is outside the scope of VAT. It is therefore not subject to VAT under the VAT Act being an incorporeal right.

The rationale for the Tribunal’s decision was that the VAT Act taxes transaction on goods and services but, rent given its peculiar nature as proceeds from property, cannot be classified as a good or service. The TAT considered the Sales of Goods Act 1893 and its equivalent version enacted by Lagos State, which defined goods as “all chattels personal, other than things in action and money and includes emblements, industrial growing crops and things attached to and forming part of the land which are agreed to be severed before sale or under the contract of saleȋ. The Tribunal also referred to the Black’s Law Dictionary, which defined goods as “tangible or moveable property other than money, especially articles of trade or items of merchandise.” The Tribunal added that contrary to the expansive meaning sought by the Respondent, FIRS, what the tenant acquires and what the landlord conveys in exchange for the rent paid for the lease or letting of the property is a bundle of rights including a right to exclusive possession to the property for the period of the lease or tenancy

The Tribunal also cautioned that the expression: “the letting out of taxable goods on hire or leasing, and any disposal of taxable goods: used in the Act must be construed by reference to goods properly so-called, that is, goods that are moveable or capable of being severed.

The Tribunal went further to distinguish between tenancy properly so-called and accommodation services rendered by hoteliers by holding as follows:

One question that may agitate our minds is, what is the position with respect to the provision of short-term leases? Do they not amount to supply of services? We must note that the provision of short-term leases in a hotel, inn and other places with similar characteristics to hotels, inns and boarding houses, and any premises, in which furnished sleeping accommodation is provided, that is used by or held out as being suitable for use by visitors or travellers including motels, guesthouses, bed and breakfast establishments, private residential clubs, hostels, and serviced flats (other than those for permanent residential use), does not create a landlord-tenant arrangement. Usually, these places provide lodging with furnished sleeping accommodation and possibly meals and other facilities such as laundry services, shared TV or rest rooms and phone services for guests and visitors. These will amount to the provision of facilities which qualify as a supply of services. Thus, they would be subject to VAT.

The TAT further reasoned that since the VAT Act did not make specific mention of rents, its nature would not allow the Tribunal to read it into the classification of goods and services. The Tribunal, relying on the case of FBIR v. Halliburton (WA) Ltd. [(2014) LPELR 24230 CA] also invalidated the purported amendment to the first schedule of the VAT Act by Circular No. 9701, titled “Detailed List of Items Exempted from Value Added Tax (VAT)” issued by the Chairman of the FIRS in 1997. Notably, the FIRS relied on this Circular as the basis for issuing a VAT assessment on the rental income of the Appellant’s commercial properties. Therefore, the invalidation of the Circular by the TAT simply means that the FIRS has no lawful basis for issuing VAT assessment on the rental income from commercial or residential properties.

Review of Previous Decisions on the Subject

Before the decisions of the TAT reviewed above, there have been other judicial pronouncements on whether the rental income from a landed property is susceptible to VAT. We would consider some of these decisions below.

In the case of FBIR v. Ibile Holdings [(2006) VOL. 6 ALL NTC Pg. 1], the TAT held that since the Respondent’s primary business was not the buying and selling of land, but building, selling and renting of properties; these activities constituted the taxable goods of the company which come under the purview of section 42 of the VAT Act, which defines ‘supply of goods’. Later in the same year of 2006, the Lagos Division of the Federal High Court (FHC) disagreed with the decision of the TAT. It held in the case of Momotato Nigeria Limited v. UACN Property Development Company Plc [(2006) VOL. 7 ALL NTC Pg. 327], that the definition of the phrase ‘supply of goods’ referred only to movable chattels and did not include land and that the meaning could not be stretched to relate to the sale of land. It, however, held that the services rendered on the land were susceptible to VAT. Yet again, the FHC in the cases of Warm Spring Waters Nig. Ltd. & Ors. v. FIRS [(2015) VOL. 13 ALL NTC Pg. 389], and Rita Okoji v. Retail Supermarket (Nigeria) Ltd [(2013) VOL. 8 ALL NTC Pg. 409] held that neither the FIRS nor its Chairman had the statutory power to amend, vary or modify the list of exempted items under paragraph 2 of part 1 of the First Schedule to the VAT Act or any other provision of the Act. It further held in the latter case that although it was the Minister for Finance that was explicitly mentioned in section 38 as the appropriate executive authority to make the amendments, it was however not going to pronounce on the propriety or otherwise of the delegation of legislative power to the Finance Minister vis-a-vis the principle of separation of powers, as same was not the issue before it.

In the case of HOMAL v. AG Fed & Anor [FHC/L/CS/1082/2019 delivered May 8, 2020], the FHC held that the Taxes and Levies (Approved List for Collection) Act could not be amended by delegated legislation but only to give effect to the enabling legislation. The TAT relied on this decision in invalidating Circular No. 9701 in Ess-ay Holdings Limited v. FIRS.