Revenue Note for Guidance

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Revenue Note for Guidance

PART 11 – IMMOVABLE GOODS

Overview

This Part contains 6 sections covering VAT rules for immovable goods. A new VAT regime for taxing property transactions was introduced in the Finance Act 2008 and applies from 1 July 2008. Under the new system,

  • The first supply of newly developed property is taxable for 5 years from completion. The second and subsequent supply is taxable for 2 years following occupation.
  • There is an option to tax the supply of property, where the supply would otherwise be exempt.
  • The letting of property is exempt from VAT, but there is an option available to landlords to tax the rents in certain circumstances – either where the parties are not connected or where the lessee can deduct over 90% of the VAT charged if the parties are connected. The option does not apply to residential property.
  • There is a capital goods scheme in operation, which relates VAT deductible to the use of property over its VAT life. (See Chapter 2 of Part 8 for details.)
  • Transitional rules apply for properties that have been developed under the old VAT on property system. There are also transitional rules for properties that were let prior to 1 July 2008 where a landlord had a waiver of exemption in place – broadly, they continue to be taxed under the old rules, with a clawback if the waiver is cancelled.

93. Supply of immovable goods (old rules)

Summary

This section sets out the special provisions that apply in relation to reversionary interests and post letting expenses in respect of properties supplied under the rules in place prior to 1 July 2008.

Details

(1)(a) An “interest” in immovable goods is defined as an estate or interest that was created for a minimum period of 10 years or, if it was created for less than 10 years, gives an option to the lessee to extend the lease to 10 years or more.

The definition also provides that a person is regarded as disposing of an interest if he/she creates a lesser interest (as defined in section 4(2A) of the 1972 VAT Act) out of his/her own interest and transfers that lesser interest to another.

(1)(b) Where the interest contains one or more options for the person to extend it, the interest is deemed to be for the full period, including the options.

(1)(c) The immovable goods to which the section applies are goods which meet either of the following conditions:

  • they have been developed by or on behalf of a person making the supply, or
  • the person making the supply was entitled to a deduction under Chapter 1 of Part 8 for the tax that was or should have been invoiced to him/her in respect of the supply or development of the goods.

(2)(a) The reversionary interest provisions under subsection (2) are restricted to cases where that reversionary interest was created prior to 1 July 2008.

Where a leasehold interest in property is subject to VAT, subsequent supplies of that property by the landlord are generally not subject to VAT unless the property is redeveloped. Only development, which is carried out by, on behalf of, or to the benefit of, the landlord, triggers a VAT charge on the supply by that landlord.

(2)(b) There is provision for the making of regulations to specify the circumstances or conditions under which development work is not treated as being on behalf of, or to the benefit of, the landlord. No regulations have been made on this matter.

(3) The post letting expenses provisions under subsection (3) are restricted to interests disposed of prior to 1 July 2008.

Deductibility of VAT on post-letting expenses incurred by the landlord, whether he or she created the lease, when those expenses are directly related to the taxable lease is provided for. VAT on post-letting expenses is deductible if—

  • the landlord is obliged to perform the services under the terms of the contract and the value of that obligation is reflected in the capitalised value of the lease for VAT purposes,
  • the landlord incurs costs that directly relate to the operation of the lease, such as expenses incurred in collecting the rent, carrying out a rent review or the exercise of an option to extend the lease or exercise a break clause.

VAT on post-letting expenses that are not reflected in the terms of the lease or are not reflected in the value of the lease is not deductible.

Relevant Date: Finance Act 2020