Tenants, Hirees Or Lessees In Nigeria Cannot Pay VAT on Residential Premises
As a way of saving cost for startups and businesses in Nigeria, it is wrong for landlords, lessors, hirers in Nigeria to demand VAT on rent paid by tenants or lessees, hirees of residential premises according to the Federal Inland Revenue Service (FIRS). The VAT is only chargeable on premises used for commercial purposes.
Here Is Why
- Residential premises are exempted from VAT under paragraph L(C) 6 of the FIRS Information Circular №9701 of 1st January 1997.
Who Pays VAT, Landlord or Tenant?
From the clarification from the FIRS, the tenant, lessee, the hiree pays VAT for use of commercial properties since he/she pays the rent, whereas the landlord pays the Withholding Tax (WHT) in respect of the property. Withholding tax is usually 10% of the rent and the agent or legal fees.
Are Agency And Legal Fees Recognized By The Act?
Yes. Both may form part of computation for rent in respect of all properties whether residential or commercial.
However, here is the trick: where agency or legal fees are charged by the landlord, hirer or lessor where the property is purely for commercial purposes, the lawyer and the agent has to pay 5% VAT each (that is total of 10%) on the fees. The VAT is deducted by FIRS from the total value of the transaction.
Where no agency or legal fees are charged where the property is purely for commercial purposes, VAT is restricted only to rent for use of the commercial property. In this case, only 5%.
Residential properties generally do not attract VAT. However, where the lawyer or the agent charges his/her 10% fee, VAT of 5% will be charged on those fees collected by them.
The Implication of This:
This simply means that your landlord, lessor or hirer cannot add VAT payment to your rent where you are using residential premises unless you are also paying agency or legal fee. In practice, this may apply to first-time tenants who have to pay agent or lawyer’s fees together with the rent.
For tenant, hiree or lessee of commercial premises, he/she must continue to pay VAT on rent for use of such premises, virtually on yearly basis, depending on the payment period. Where agency or legal fees are paid, VAT will also be paid on them, in addition to the VAT already paid on the rent.
In essence, new tenants will receive double VAT deductions for their first rent payment for use of a commercial property. Subsequent tenants of commercial properties in Nigeria will have VAT restricted to only to rent paid.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world.