ARE ALL INCOME RECEIVED FROM THE RENT OF A PROPERTY SUBJECT TO VALUE ADDED TAX?

Value Added Tax (Modification Order) 2020

The application of Value Added Tax to rental income has been a major tax issue without clarity. Guidance was provided following a decided court case which clarified that “rent received on properties solely used for residential purpose” should not attract value added tax. This decided case prompted the Federal Inland Revenue Service to include this exclusion specifically in the first schedule (list of items exempted for VAT) of Value Added Tax Act.

The interpretation and application of this exclusion in practice was that the use of the property formed the basis of the exclusion from value added tax and this is usually validated in the provisions of the lease agreement executed by the parties to the lease contract. The lease contract states the use of the property and this is sufficient for the determination of the applicability of the Vat law. The legal nature of the contracting parties was “irrelevant”.

The Finance Act 2019 has made some changes to the VAT law and following this the FIRS issued some guidance on the application of the new provisions of the vat act. On the 3rd February 2020 the Government issued a Gazette tagged Value Added Tax (modification order) 2020 through the office of the Minister of Finance, Budget and National Planning.

The modification order provides clarity to the application of Value Added Tax on lease and rents derived from properties and the application of the value added tax law thereon. The modification order inserted this provision to expand the rent exempted from value added tax:

“Lease and rental of residential accommodation by persons other than corporate entities”

Deriving from this clause the new application rules are as follows:

1. Lease and rents on properties used for commercial purpose will attract value added tax in any circumstance.

2. Properties leased by a company from an individual, an estate or a registered entity (Business name) and used by the company for commercial purpose will attract value added tax

3. Properties leased by a company from an individual, an estate or a registered entity (Business name) and used by the company for residential purpose will attract value added tax

4. Properties leased by an individual from an individual, an estate or a registered entity (Business name) and used by the individual (not being a company) for commercial purpose will attract value added tax

5. Properties leased by an individual from an individual, an estate or a registered entity (Business name) and used by the individual (not being a company) for residential purpose will NOT attract value added tax

6. Properties leased by an individual, a registered entity (not being a limited liability company) from a company that is a limited liability company and used by that individual, a registered entity (not being a limited liability company) for residential purpose will NOT attract value added tax.

The Modification order was dated February 3, 2020 but was recently made public in the month of May 2020. This in effect means all provisions therein are effective from the date on the gazette and thus, would apply retrospectively.

Received from ESV Kunle Adedeji, National President, Association of Estate Agents in Nigeria (A.E.A N.).

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