Tax Appeal Tribunal holds that Leases on real property are not subject to Value Added Tax

On 10th September 2020, in Appeal Number: TAT/LZ/ VAT/029/2019, ESS-AY Holdings Limited v Federal Inland Revenue Service, the Tax Appeal Tribunal (TAT) held that rent on real property is not subject to value added tax (VAT).

The appellant in this appeal invests in and develops commercial and residential real properties which are leased out to generate income through rents. Following a tax audit for the 2014 – 2016 accounting years, the respondent subjected the appellant to VAT in respect of rental income generated from the appellant’s commercial properties.

The appellant objected to the assessment on grounds that a lease is not a good or service which can be subject to VAT. The appellant argued that a “good” is tangible or moveable personal property other than money, while a “service” is the act of doing something useful for a fee or an intangible commodity in the form of human effort such as labour, skill or advice. The appellant asserted that rental income is neither a good nor a service. Rather rental income is generated from the grant of a license, lease or a form of interest in property as opposed to a transfer of ownership under a supply of goods.

On the other hand, the respondent argued that rent on commercial properties amounts to a supply of goods within the context of the VAT Act because the development of the land into commercial and residential buildings amounts to value added to the land. The respondent relied on the VAT Act (Modification) Order 2018 which expressly excludes from VAT the rent from residential properties, and argued that the silence in respect of rent on commercial properties implies an intention to subject the same to tax.

Issues for determination

In delivering its judgment, the TAT examined the following issues:

(i) whether rental income is subject to VAT;

(ii) whether the Federal Inland Revenue Service (FIRS) has the power to issue Information Circular 9701 which purported to subject rents on commercial property to VAT.

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