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On the market: VAT and property sales

May 28, 2018
Property transactions are a unique and complex area in VAT law. Property sales can have potentially costly consequences for both purchasers and vendors. The VAT treatment of property sales differs vastly from the supply of other goods and services. Donal Kennedy explains.

I’m selling a property, what are the VAT implications?

There are a number of initial questions to ask - Is the property commercial or residential? Is the sale governed by the transitional rules (for property held on 30 June 2008)? Whether or not one is obliged to charge VAT on the sale? There are general rules, and many exceptions to these.

For commercial, the general rule is that one is required to charge VAT on the sale of a new completed property and not on the sale of an old property.  A completed property is regarded as old if completed more than five years prior to sale, with no significant development work within the five years prior to sale.  There are some exceptions where there has been two years occupancy prior to a second or subsequent sale post completion.

What constitutes development can be quite broad in its scope from a VAT perspective, so if any work has been carried out to a property, including relatively minor works, this should be considered in the context of a sale.

If a property is “incomplete”, and there has been development in the twenty years prior to sale, the sale will be subject to VAT.

If a sale is exempt from VAT, there can be VAT cost for the vendor under the capital goods scheme if the vendor has recovered VAT in the previous 20 years. To avoid such VAT costs one can, in certain circumstances, seek the agreement of the purchaser to agree to make the otherwise VAT exempt sale subject to VAT (known as the joint option to tax).  As this requires the purchaser’s agreement it can be contentious.

Separate to VAT exempt sales, one may not be required to charge VAT on the sale of a property where transfer of business relief applies to the sale. Where this relief applies there is no supply for VAT purposes, but there will be VAT implications. Transfer of business relief is not an optional relief, and where it applies the vendor must hand over capital goods records if the sale would be exempt from VAT but for the application of the relief. The purchaser must then take on and step into these capital goods records. It is important to consider the context of a transaction to establish if the relief applies or not. There is detailed guidance published by the Revenue Commissioners on this. That said, Revenue are currently reviewing this guidance with a view to a number of changes, so watch this space.

There are also complex anti-avoidance rules for connected party sales that can be costly for a vendor which also need to be considered where you are selling property to a connected party.

As regards residential property sales, the rules are quite different from commercial property rules. As a general rule, the sale of residential property by the developer will always be chargeable to VAT, irrespective of the age of the property. One must give very careful consideration to the VAT clause to be included in a sales contract, as that will very often govern the VAT treatment of the transaction, as VAT law gives considerable latitude to the parties to determine the VAT treatment of many property transactions. The Law Society of Ireland has published a number of VAT clauses designed to cover several types of transactions but, in some cases, a vendor may need to draft their own VAT clause to protect his/her interests.

Generally, a vendor will also be asked to complete a document known as Pre-Contract VAT Enquires, again, published by the Law Society of Ireland. This is designed to flush out the VAT history of a property, and the proposed VAT treatment of a transaction. Preparation of the replies is a very useful tool for a vendor in determining how a sale should be treated for VAT purposes.

I’m buying a property, what are the VAT implications?

Again there are a number of initial questions – Is the property commercial or residential? How does the vendor propose to treat the sale? Is one being charged VAT?  If the vendor proposes to charge VAT one must be satisfied that it is correctly chargeable. In this context, Revenue can deny a VAT input credit if VAT was incorrectly charged - for example, if transfer of business relief applies to a sale and VAT is incorrectly charged.

One must consider whether or not one can recover VAT on the purchase, which is linked to one’s intended use of the property. If one intend to use the property for a fully VATable business one would be entitled to recover the VAT, but one will  would need to monitor  VAT use of the property for the next 20 years. If one’s VAT recovery position varies year on year then one will have potential annual liabilities to/ repayments from Revenue under the capital goods scheme.

If the vendor is seeking to make the sale subject to VAT by the exercising the joint option to tax one must consider their   VAT position carefully. Remember the joint option to tax requires a purchaser’s agreement and this may well not be in the best interests of a purchaser.  A purchaser should be aware that in agreeing to the joint option the vendor secures a VAT advantage (avoiding a VAT liability/increase in recovery, the purchaser must monitor the use of the property for the next 20 years, the purchaser will have an exposure to VAT costs for any VAT exempt use of the property and if there is a sale by the purchaser within twenty years he/she will need to persuade the next purchaser to agree to a joint option to avoid VAT costs.

If the acquisition is subject to transfer of business relief, and would have been exempt from VAT but for the relief, one needs to consider one’s obligations under the capital goods scheme.

If the acquisition is subject to transfer of business relief, and would have been chargeable to VAT but for the relief,  and one would not have been entitled to recover  the VAT that would have been charged but for the relief,  one will have to liability to Revenue of the VAT one would not have been entitled to recover.

As a purchaser one should make appropriate enquiries, prior to signing a contract, as to the proposed VAT treatment of the transaction and the VAT history of the property. This can be done by way of the Pre-Contract VAT Enquires referred to above.

One should also be satisfied that the VAT clause one is signing up to in a contract is appropriate for the transaction from a purchaser perspective.

Donal Kennedy is a Director of Indirect Tax in Deloitte.