Tax Appeal Tribunal Rules on VAT Applicability to Rental Income from Real Estate

In a landmark decision on October 19, 2023, the Tax Appeal Tribunal (TAT) in Lagos ruled that rental income derived from real estate properties is not subject to Value Added Tax (VAT). This ruling emerged from a case between NGX Real Estate Limited and the Federal Inland Revenue Service (FIRS), focusing on the applicability of VAT on rental income and the relevant periods defined by amendments to the VAT Act introduced by Finance Acts in 2019 and 2020.

Background and Historical Context Before the Finance Act of 2020, there was uncertainty regarding the application of VAT to rent and leases, given the ambiguous language in the VAT Act. The Finance Act of 2019 did not explicitly include or exclude rent or lease, leading to reliance on FIRS Information Circular 9701. This circular suggested that VAT was not applicable to residential property rents but left commercial property rents subject to VAT.

Conflicting positions and judgments further complicated the landscape:

  1. The VAT Modification Order of 2020 exempted residential accommodation leases from VAT, but the 2021 Order removed this exemption.
  2. In a 2020 case in Benin, the TAT ruled that VAT applied to rent from commercial property, referencing Circular 9701 but acknowledging its limitations.
  3. In another 2020 case in Lagos, the TAT ruled that rent, whether commercial or residential, was not subject to VAT, emphasizing the incorporeal nature of property rights.

Appeal by NGX Real Estate Limited NGX, a real estate company, faced a tax assessment of ₦36.2 million from FIRS for unremitted VAT on rental income in the 2020 financial year. Disputing this assessment, NGX filed an appeal with the TAT, asserting that FIRS misinterpreted the VAT Act as amended by Finance Acts in 2019 and 2020.

NGX’s argument centered on the definition of “goods” and “services” in the Finance Acts:

  1. Finance Act 2019 excluded interest in land from the definition of goods.
  2. Finance Act 2020 further refined the definitions, explicitly excluding land and building from the term “goods.”

NGX contended that these amendments indicated a deliberate exclusion of interest in land, supporting their position that rental income, being related to incorporeal property rights, should not be subject to VAT.

Implications and Conclusion The TAT’s ruling has significant implications for businesses, particularly those in the real estate sector, clarifying that rental income from real estate properties is not subject to VAT. This decision provides much-needed clarity in an area marked by uncertainty and conflicting interpretations, offering relief to businesses navigating tax obligations related to rental income.

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