THE Lagos Tax Appeal Tribunal in the case of Ess-AY Holdings Limited v. Federal Inland Revenue Service (FIRS) in Appeal Number: TAT/LZ/VAT/029/2019 has declared that rent derived from the lease of real properties whether residential or commercial is not subject to the value-added tax regime under the Value Added Tax Act.
This is contained in a judgement of the Tribunal dated 10th day of September, 2020 which was made available to TheNigeriaLawyer (TNL).
Brief Statement Of Facts
After a tax audit, FIRS vide a letter dated 19th day of October, 2018, informed the Appellant of its intention to assess the Appellant to additional taxes particularly with respect to Value Added Tax (VAT) on incomes derived from letting out its properties for the 2014 – 2016 accounting years.
As a result of this letter, several meetings were held between the parties to reconcile the issues and correspondences were exchanged.
However, these meetings did not yield any positive outcome because by July 9, 2018, the Appellant was served amongst others, the Respondent’s VAT Assessment Notice in relation to VAT on incomes derived from its commercial tenants. The Appellant objected to the said VAT Assessment Notice via its objection letter dated 15th day of July, 2019.
Besides, on 26th day of July, 2019, FIRS served the Appellant Notice of Refusal to Amend (NORA) dated 22nd day of July, 2019 and aggrieved by the turns of event, the Appellant approached the Appeal Tribunal and entreated it with the following two questions for determination:
1. Whether rental incomes are subject to Value Added Tax (VAT) under the Value Added Tax Act CAP V1 LFN 2004 (as amended – VAT Act); and
2. Whether the provisions of the Federal Inland Revenue Service Information Circular No. 9701 dated 1st January, 1997 seeking to exempt only rents from residential properties is not ultra vires the Respondent?
‘The Appellant argued that VAT is not chargeable on the rent paid by a tenant irrespective of the property involved (whether residential or commercial).
‘The Appellant’s contention was premised on the ground that payment of rent does not amount to supply of goods or services. The Respondent on the other hand argued that VAT was chargeable on the rent paid by a tenant of a commercial property.
‘The Respondent’s argument was premised on the notion that rental incomes in respect of commercial properties are not excluded under the VAT Act and Circular No. 9701 made by FIRS dated 1st January 1997 which Circular expressly excluded VAT on the rent for residential properties.’
Meanwhile, having considered the pros and cons of the arguments placed before it by both parties, the Tribunal said that “it is called to determine whether letting or lease of real property is within the scope of the VAT Act such that the rent paid by a Tenant in consideration for the lease or tenancy is subject to VAT.”
However, the Tribunal preliminarily noted that the approach of both parties are not helpful.
“It is important to point out that both the Appellant and the Respondent laid more emphasis on VAT not being charged or being charged on rent paid by a tenant, and this approach, we observe, is unhelpful in the effective determination of the issue at hand.“
However, the Tribunal said what determines whether tax is payable, the nature of the transaction must be examined.
“Thus, in determining whether or not VAT is payable, it is the nature of the transaction that should be looked into and not the consideration paid for the transaction. Under the VAT Act, VAT is payable only in respect of supply of goods or services. Thus, for VAT to be chargeable on a transaction, the transaction must qualify as a transaction for supply of goods or services.”
In addition, the Tribunal stated that for the effective determination of the case, there is a need to ascertain the meaning of “good and services” not defined under the VAT Act.
Therefore, relying on Blacks Law Dictionary, Section 62 of the Sale of Goods Act 1893, Sale of Goods Law of Lagos State, Section 61 of the United Kingdom’s Sale of Goods Act of 1979, the Tribunal said “it is clear that before a thing can be regarded as a “good”, it must be moveable and where it is on a land, it must be severable from the land”.
However, the Tribunal ruled that lease in respect of real properties cannot be tagged as goods.
“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 Vs 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.”
“In our opinion, the transfer of interest in real properties does not amount to rendering a service. The Tribunal finds wisdom in the case of CNOOC Exploration Production Nigeria Limited Vs AG Fed & Ors. We believe this wisdom may have also accounted for the recent amendment introduced into the VAT Act via the Finance Act 2019. The court had enjoined the country to borrow a leaf from the UK VAT Act if it is desired to charge VAT on incorporeal properties like the grant, assignment or surrender of any right.” The Tribunal added.
To nib the bud on the head, the Tribunal further ruled that VAT is not chargeable on lease of real properties as they do not qualify as supply of goods or services .
“We hold 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. A transaction for lease of real property is not one of the transactions to which the VAT Act applies. The application of the VAT Act is limited to transactions for supply of goods or services and nothing more. It is trite that where a statute mentions specific things, those things not mentioned are not intended to be included.” The Tribunal said.
“The Respondent asserted that the Appellant was involved in an economic activity, that it was exploiting some property for the purpose of obtaining income therefrom by way of trade or business. Indeed, that may be the law. However, the economic activity or the exploitation of property to which the section applies must be one that is within the scope of the VAT Act. If the transaction is outside the scope of VAT Act, then VAT is not chargeable.” It added.
Therefore, the Tribunal resolved the first issue in favour of the Appellant.
“This issue is resolved against the Respondent. 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.”
In another development, the Tribunal was confronted with Exhibit EHL 6, FIRS Information Circular with serial number 9701, titled “Detailed List of Items Exempted from Value Added Tax (VAT)” published on the 1st of January 1997.
The question before the Tribunal was whether the circular was validly made to such an extent that the liability of the Appellant can be gauged thereon by the Respondent.
Meanwhile, the Circular was made by FIRS and not the Minister of Finance but the latter was said to have delegated the making of same. Thus, the Tribunal held that it was not properly made.
“What shall we say to these things? We find that Exhibit EHL 6 is an Information Circular made by the Respondent. We hold that Exhibit EHL 6 does not in our view and cannot constitute a regulation within the meaning of VAT Act. It is not, as the Court of Appeal held, a subsidiary or delegated legislation.” The Tribunal ruled.
In addition, the Tribunal held that it was irregularly made as it did not emanate from the appropriate authority.
“It is our considered view that an amendment to the Schedule of the VAT Act cannot be done by an Information Circular, it must be by way of Regulations properly so called, made by the appropriate authority which in our view is the Minister for Finance. It is trite that only the appropriate authority can validly exercise a delegated power. We recognise that there are instances where delegated powers can be further delegated. However, it is our view that even if the Minister has further delegated the power to the FIRS or its Chairman as argued by the Respondent’s Counsel, Information Circular is not an appropriate framework for the making of such delegated legislation.”
Besides, the Tribunal clarified that pursuant to the decision of the Federal High Court in HOMAL Vs AG Fed & Anor Suit No. FHC/L/CS/1082/2019 delivered May 8, 2020 relied upon by the Respondent, that it was held that the VAT Order made by the Finance Minister under Section 38 of VAT Act was in breach of the doctrine of separation of power and as such null and void, was unhelpful to its case.
“In the final analysis, the Tribunal finds merit in this Appeal which is accordingly upheld. The assessed VAT liability of the Appellant together with the interest and penalties is hereby set aside.” The Tribunal concluded.
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