Applicability Of Value Added Tax To Leases Of Real Property In Nigeria

By Ebube Godwin Onyejekwulum Esq

INTRODUCTION

The major focus of this article is on the controversial issue which raises the question on whether lease of real property falls within the scope of VAT Act in Nigeria to the extent that rent paid as consideration by the tenant to the landlord should be subject to VAT. It is common to see tax payers and the FIRS taking divergent positions on the subject matter. The conflict on the issue can be traced to the language employed by the drafters of the law. While the VAT Act, CAP V1 Laws of the Federation (LFN) 2004 had provided for a definition of “supply of goods and services”, it omitted the meaning of “goods” and “services” for the purposes of VAT. The omission was the major contributing factor to the ambiguities in interpreting the Act. These ambiguities were demonstrated in two recent decisions of the Tax Appeal Tribunal. In the previous year, The National Assembly passed the Finance Act 2019 which amended the Value Added Tax Act to introduce the definition of goods and services amongst other alterations. While the definition makes it clear that intangible rights now qualify as taxable goods under the Act, it leaves other ambiguities because a lease could be interpreted as a transfer of interest in land which makes it exempted from VAT or it could be treated as a service that is provision of a real property for a defined tenure. The article contains a brief review of the conflicting judgments, highlights the amendment to the VAT Act relating to the subject and recommends ways of settling the controversy and thereby creating certainty in the business environment.

RECENT CONFLICTING DECISIONS ON THE SUBJECT

1. Chief J.W. Ellah, Sons & Company Ltd v. Federal Inland Revenue service (Ellah Case) Unreported Judgment in Appeal No: TAT/SSZ/001/2019

In its ruling the Tribunal addressed the question which relates to whether rent on residential or commercial buildings or premises are VATable or not. The Tribunal referred to Section 2 of the Value Added Tax Act 2007 which defined VAT as:

“The tax that shall be charged and payable on the supply of goods and services (in this act referred to as taxable goods and services) other than those goods listed in the First Schedule to this Act.”

The Tribunal held that the above definition means that all goods or services that are not expressly exempted as listed in the first schedule were VATable. The Tribunal also referred to the definitions of the operational words in Section 2 contained in Section 46 of the Act as follows:

 “Supplies” means “any transaction, whether it is the sale of goods or performances of a service for a consideration that is, for money or money’s worth;

“Supply of Services” means any service provided for a consideration”

The Tribunal relying on the said definitions held at page 17 of the ruling thus:

“We view these definitions very apt in resolving the contentious issue raised by parties on whether rent on residential or commercial buildings are subject to VAT. From the above definitions, supply of goods includes the letting out of goods on hire or leasing. The Longman Dictionary of contemporary English defines let out as ‘charge someone an amount of money for the use of a room or building’. The same dictionary gave the meaning of Hire as ‘to pay money to borrow something for a short period of time’. In this case it means to pay money for a periodic or temporary use of building and similarly the Cambridge Dictionary defines Leasing as a financial arrangement in which a person, company etc pays to use a land, a vehicle etc for a particular period of time. From the above, it is obvious that commercial buildings where a charge, fee, rent or any other consideration is payable is subject to VAT whereas domestic or residential building, in our opinion are not VATable.”

Further, the Tribunal relied on the Respondent’s Information Circular 9701 dated 1^st January, 1997 and the decision in the case of Federal Board of Inland Revenue v. Ibile Holdings (All NTC vol. 6 Page 1) to find that the Respondent was right to demand VAT on the lease of commercial buildings of the Appellant since the circular exempted rental income from residential leases from VAT but did not exempt leases from commercial buildings.

2. ESS-AY HOLDINGS LIMITED V. FEDERAL INLAND REVENUE SERVICE (Ess-ay case) Unreported judgment in Appeal No: TAT/LZ/VAT/029/2019

In this case, the Tribunal reasoned that since the VAT Act did not define the terms “goods” and “services”, it had to rely on other sources for guidance as follows:

1. The Blacks’ Law Dictionary defines goods as; “tangible or moveable property other than money, especially articles of trade or items of merchandise.”
2. Section 62 of the Sale of Goods Act 1893 (a Statute of General Application enforced in England as at 1st January 1990 adopted into Nigeria) defines goods to include all chattels personal other than things and money; and including emblements, industrial growing crops, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of Sale.
3. The Sale of Goods Law of Lagos defines “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 sale.
4. Section 61 of the United Kingdom’s Sale of Goods Act of 1979, defined “goods” as: “all personal chattels other than things in action and money … all corporeal moveables except money; and in particular 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 sale.”
5. Black’s Law Dictionary defined “Service” as “an intangible commodity in the form of human effort, such as labour, skill or advice.”

Based on the above definitions, the Tribunal found that it was impossible to regard real properties as an intangible commodity. The Tribunal referred to the decision of Federal Board of Inland Revenue v  Ibile Holdings, where The VAT Tribunal relying on section 42 of the VAT Act (s. 46 Act under the VAT Act Cap V1 LFN 2004) held that Ibile Holdings’ Commercial Lease transactions were taxable on the ground that they constituted supply of goods under the Act. On the other hand, the Tribunal referred to the case of Momotato Nigeria Limited v UACN Property Development Company Plc (Unreported Judgment in Suit No: FHC/L/CS/1016/05), where the Federal High Court held that sale of land, in itself, does not constitute a supply of goods, and therefore, is not liable to VAT. After considering the two Judgments, The Tribunal held that the decision in Federal Board of Inland Revenue v Ibile Holdings proceeded on the footing that real properties could be classified as goods.

The Tribunal further referred to the decision in the case of CNOOC Exploration and Production Nigeria Limited and South Atlantic Petroleum Limited v Attorney General of the Federation & Ors (2013 1 NRLR 88) (The CNOOC Case) where the Federal High Court agreed with Plaintiff that the item assigned was a right which was neither ‘goods’ nor ‘services’, but a ‘chose in action’ and, accordingly, the transaction was not liable to VAT. The court noted that in the United Kingdom, statutory intervention accounted for the reason assignment of a right constituted ‘services’, the supply of which is VATable.

Consequently, the Tribunal held at page 10 of its ruling as follows:

“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. We find it difficult to agree with the Respondent that the lease in this appeal amounts to a supply of goods. Our disagreement stems from the fact that the lease in this appeal is a lease in respect of real properties. Real property is best characterized as property that does not move, or that is attached to the land. See Federal Republic of Nigeria v Yakubu & Ors. Because of their nature, real properties cannot be regarded as goods. They are not severable or moveable. Thus, if real properties do not qualify as goods, it follows that any transaction relating to real properties cannot qualify as a supply of goods.”

Ultimately, the Tribunal decided that the lease of real properties does not amount to supply of goods or services and therefore VAT is not chargeable or payable on the transaction.

Comment on the Decisions

One striking feature of the above judgments is that they are conflicting decisions of the Tax Appeal Tribunal on practically similar issues. delivered one day apart (September 9^th and 10^th 2020 respectively).

A cursory reading of both decisions reveals that the Ess-ay case was more detailed and well articulated on the issue in discourse. It is important to note that both rulings were delivered by TAT of two different zones which are courts of coordinate jurisdiction. It is obvious that tax payers will prefer the decision in the Ess-ay case while the FIRS will prefer the decision in the Ellah case. This will create a blurry position whereby parties will adopt the interpretation which appears most favorable to them. It follows that a decision of the Federal High Court in its appellate capacity will be necessary to determine the valid position.

In my opinion, the VAT Tribunal in Ibile Holdings case and the Tax Appeal Tribunal in Ellah case erred in law for implying that when an item is not listed under the exemption list in the First Schedule to the Act it means that VAT will be applicable on such items. Ordinarily, the issue of exemption should only arise where an item is determined to be a good or service. There are items which do not fall under the classification of goods or services and exemption of those items will be pointless. Certainly, a situation where an item is subjected to VAT because it was not exempted under the First Schedule to the Act would amount to creation of another category of taxable items besides “goods” and “services”. The decision in Ess-ay case is preferred on this point.

It is important to note that the decisions were based on the provisions of the VAT Act prior to the amendment of the relevant sections by the Finance Act, 2019. The question that necessarily arises is whether the amendment of the VAT Act has resolved the controversy on the applicability of VAT to lease transactions?

Amendment to the VAT Act

The Finance Act 2019 made sweeping amendments on various tax laws in Nigeria and the Valued Added Tax Act was not left out. It is possible that the conflicting decisions in the Ellah and Ess-ay case may have been decided differently if the tax appeals were based on the Finance Act 2019.

Prior to the amendment of the VAT Act by the Finance Act 2019 (FA 2019), there was no clear definition of taxable “goods” and “services” under the VAT Act and this was the major contributing factor to the controversy regarding the applicability of VAT to lease transactions especially commercial leases. Section 46 of the Finance Act 2019 amended Section 46 of the Vat Act 2007(The interpretation section) to include the definitions of “goods” and “services” as follows:

“goods” means –

1. All forms of tangible products that are moveable at the point of supply but does not include money or securities; and
2. 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”

“services” means anything other than goods, money or securities which is supplied excluding services provided under a contract of employment”

The above definitions imply that incorporeal rights may now be subject to VAT except interests in land. While it may have been correct to argue under the old VAT Act  that incorporeal rights do not amount to taxable goods, the position has changed with the definition of “goods” included in the amended VAT Act. The law now recognizes goods that are tangible and moveable as well as intangible goods.

The new codification of a definition for “goods” and “services” in the VAT Act seems to have settled the controversies surrounding the applicability of VAT to property transactions involving intangible rights and securely captured all forms of transactions involving taxable goods and services in FIRS’ Tax net excluding those exempted under the Finance Act. However, a new question arises as to whether a residential and commercial Lease can be classified as an “interest in Land” for the purpose of VAT.

Under a typical lease/tenancy transaction, the tenant/lessee is considered to be entitled to exclusive possession of the let or leased property for a defined period in exchange for the payment of rent. A lease grants the holder possessory interest over the property while the lessor/landlord has the right to the reversionary interest in the property. In Nigeria, ownership of all land is vested in the state and the maximum interest that a person can acquire over real estate is a right of occupancy. This can be classified as being equivalent to a lease.

Furthermore, under section 18 of the Interpretation Act LFN 2004, “Land” was defined to  include any building and any other thing attached to the earth or permanently fastened to anything so attached excluding minerals. This is in line with the popular legal maxim: Quic quid plantatur solo, solo cedit, which means that “whatever is affixed to land becomes a part of the land”. On this basis it will be impossible to separate an interest in a property or building on the land. It follows that, Lease of building amounts to lease of the land also. Therefore, in my view, a lease qualifies as an interest in Land which should not be subject to VAT by virtue of same having been excluded from the definition of goods.

In the context of the new definition of ‘service’ introduced by the Finance Act 2019, a tricky question which necessarily arises is whether lease can be treated as a service. In attempting to answer this question, leases have to be distinguished from short term lodging provided by hotels, motels, guest houses and other similar places. Usually, these places provide accommodation together with additional facilities such as well furnished lodging facility, bed, cleaning & laundry services, cable network, internet service, meals, shared television or rest rooms and phone services for its guests and visitors. The provision of such facilities jointly with the lodging space will qualify as a supply of ‘service’  which will be subject to VAT. To illustrate the point, it is a well known fact that foodstuffs are exempt from VAT. However, food purchased from restaurants are usually charged to VAT. This is because eateries usually provide additional facilities to the consumer which may include entertainment facility like cable TV, internet access, good ambience with air conditioning system, delivery services etc. However, the lessor or a landlord in a lease or tenancy does not render any service to the lessee/tenant in the form of additional facilities such as the ones listed above. He only transfers his right in the property to the lessee/tenant and for the tenure of the lease and nothing more. In my opinion, the transfer of interest in real properties in the form of lease does not amount to supply of ‘service’ with respect to Nigeria’s VAT Act. This position will be different if lease of real property was classified as a service under the Act.

There were controversies under the old VAT regime as demonstrated by the conflicting decisions of the TAT yet the amendment of the Act seems not to have removed the uncertainty in the VAT Act.

Conclusion

The article has examined the divergent positions on the VAT status of lease transactions in Nigeria both under the old VAT regime and the ambiguity contained in the amended VAT Act. The controversy regarding the applicability of VAT to rental income was at its peak prior to the commencement of the Finance Act 2019 as demonstrated by the Ell-ah and Essay case. Regrettably, the introduction of the definition of goods and services into the VAT Act by the Finance Act 2019 appears not to have resolved the issues surrounding the application of VAT on lease/tenancy transactions involving real property in Nigeria. It is therefore proposed that, in order to promote certainty, there should be clarity through a more detailed amendment of the VAT Act and/or a definite judicial pronouncement on the subject matter.Clarity is required to determine whether residential and commercial leases of real property qualify as taxable goods or taxable service within the scope of the VAT Act. This can be achieved through clearly worded statutory provisions and/or a well reasoned superior court’s interpretation of the law. It is recommended the National Assembly should define the meaning of “interest in land” for the purpose of VAT as clearly provided in some other jurisdictions. For instance in the England and Wales, according to Option to Tax lands and Buildings Notice 742A “property” means land (including buildings and civil engineering works) while “interest in property” means any interest in, right over or license to occupy property. Also, in some other jurisdictions the circumstances that will make a lease of property to be either deemed as a taxable supply or exempted are contained under the enabling law. In India, the GST Act stipulated a threshold thereby avoiding uncertainty on the applicability of VAT on the any commercial lease transaction in question.

Indeed, a VAT Modification Order may not be the suitable mode to resolve the issue as the Courts have held that the Minister of Finance cannot validly exercise any power to issue subsidiary legislation, even when such powers have been donated under the statute. (See The Registered Trustees of Hotel Owners and Managers Association of Lagos v. Attorney-General of Fed.& Anor  Unreported Judgment in Suit No: FHC/L/CS/1082/2019 delivered May 8, 2020.) The rationale being that such donation of power runs contrary to the principle of separation of power embedded in Nigeria’s Constitution. It goes without saying, that any information Circular released by the FIRS will not be effective in this regard. (See Halliburton (WA) Limited v FBIR  (2013 11 TLRN 84 at 110 and Warm Spring Waters &Ors v.  FIRS Unreported, Suit No: FHC/L/CS/57/2015)

To wrap this up, it is suggested that Nigeria should borrow a leaf from the legal provisions of other jurisdictions such as India, England and Wales if the ambiguity in our VAT law will be clarified and ultimately lay to rest the knotty issue of VAT’s applicability to lease transactions or rental income on real properties.

Ebube Godwin Onyejekwulum Esq.

LLB(Nigeria), BL, ACIArb(UK), LLM Taxation (In View), Associate at Synergy Attornies, Lagos., Email address: Ebubeonyejekwulum@yahoo.com