95. Transitional measures for supplies of immovable goods

Summary

This section deals with the transitional measures that apply to properties that have been subject to tax under the “old rules” in force prior to 1 July 2008 and are disposed of, or let, under the “new rules” post 1 July 2008. The transitional measures apply to both freeholds and leaseholds.

Details

(1)(a) The section applies to completed immovable goods (freeholds and freehold equivalent interests) that are acquired or developed by a taxable person prior to 1 July 2008 and that have not been disposed of by that taxable person before that date. The section applies until the goods are disposed of by the taxable person on or after 1 July 2008. In the notes on this section, these properties are referred to as “transitional properties”.

(1)(b) The section also applies to interests (other than a freehold interest or a freehold equivalent interest) created by the taxable person prior to 1 July 2008 and held by that person on 1 July 2008. These are leasehold interests that were treated as supplies of goods under the old rules. The consideration on which VAT was charged (i.e. the taxable amount) included the capitalised value of the rent payable under the lease, as well as the premium, etc. The section applies to interests and reversionary interests until they are surrendered by the taxable person after 1 July 2008. In the notes on this section, these interests are referred to as “legacy leases”.

(1)(c) This section also applies to completed immovable goods being residential property or burial grounds acquired or developed by a public body prior to 1 July 2010, but sold after that date.

(2) Where an interest under subsection (1)(b) (in other words, a legacy lease) is surrendered, then, for the purposes of the capital goods scheme:

• (a) tax incurred includes tax chargeable on the surrender, but does not include tax incurred prior to the surrender.
• (b) the adjustment period is set out in subsection (12)(c)(iv), and the initial interval (the first 12 months of the adjustment period) starts on the day of the surrender.

(3) The tax treatment of freeholds/very long leases under subsection (1)(a) (in other words, transitional properties) which are supplied “completed” depends on whether the holder could deduct VAT on the acquisition or development:

Where a person was not entitled to deduct the tax chargeable on the acquisition or the development of the transitional property, and where those goods were not subsequently developed on or after 1 July 2008, other than “minor” development, the supply is not chargeable to VAT. However, a joint option for taxation under section 94(5) may be exercised, and tax is then payable by the purchaser under section 94(6). This is subject to the anti-avoidance provisions in section 94(3).

(4)(a) Exempt lettings are covered in subsection (4). Where a taxable person:

• acquired, developed or has an interest in a transitional property or a legacy lease,
• was entitled to deduct tax charged on the acquisition or development of that property, and
• makes an exempt letting,
• then, that person (i.e. the landlord) is required to calculate a deductibility adjustment, which is payable as if it were tax due for the taxable period in which that letting takes place.

(4)(b) The amount of this deductibility adjustment equals the amount of VAT deductibility that the landlord was entitled to deduct, less one twentieth for each year between the date of acquisition or the last development and the date of the surrender.

(4)(c) A receiver/mortgagee is obliged to calculate the relevant deductibility adjustment and pay any amount due, where the receiver was appointed or the mortgagee took possession of a transitional property in respect of which the owner had claimed deductibility and the receiver/mortgagee subsequently made an exempt letting of the property.

(5) The assignment or surrender of a legacy lease is deemed to be a supply of immovable goods if it occurs within 20 years of the tenant’s acquisition of it. (20 years represents the CGS life of the lease.)

Whether or not it is taxable depends on whether or not the tenant had deductibility – see subsection (7).

(6) Where a person supplies transitional property or a legacy lease on which tax is chargeable but that person was not entitled to deduct the full amount of tax on the acquisition or development of the property, he or she is entitled to make the appropriate adjustment as if the capital goods scheme applied to that transaction (see Chapter 2 of Part 8).

(6A) Public bodies may make a deductibility adjustment, no greater than the amount of VAT due on the sale, for housing and burial plots sold on or after 1 July 2010, which were acquired by them before that date and where there is otherwise no entitlement to VAT input credit.

(7) The question of whether or not there is going to be VAT on the supply of the legacy lease under subsection (5) depends on whether the tenant was entitled to deduct input VAT when he/she acquired the lease.

• (7)(a) Where a person was entitled to deduct tax on the acquisition of the legacy lease or development of the property, a charge to tax arises in the case of an assignment or surrender of an interest in that legacy lease.
• (7)(b) Tax does not arise on an assignment or a surrender of an interest in a legacy lease, where no right to deductibility arose on the acquisition or the development of the legacy lease, but a joint option for taxation may be exercised in such a case.

Example: X grants Y a 35-year lease on 1/7/2000 (old rules). VAT = €1million was charged on the capitalised value. This was deducted by Y. The tenant (Y) has the interest on 1/7/2008 (start of new rules).

The adjustment period is 20 years from 1/7/2000. Y assigns the lease to Z on 15/4/2012.

Because Y had deductibility, and because the assignment occurs within the 20-year period, the assignment is taxable (on a reverse charge basis).

(8)(a) There is a special rule for calculating the “taxable amount” for legacy leases. This applies despite the rules on taxable amount in Chapter 1 of Part 5. The tax rate is 13.5%.

(8)(b) Paragraph (b) contains the formula to be used for the calculation of tax on assignments or surrenders where subsection (7) (legacy lease) applies, and confirms that the tax is subject to the reverse charge mechanism.

The cost of development by the tenant (i.e. refurbishment) is excluded when calculating the amount of tax due. Refurbishment by the tenant is covered by the capital goods scheme (Chapter 2 of Part 8).

Example: Following on from the example above, the amount in accordance with the formula = T × N/Y = €1m × 9/20 = €450,000.

This is the tax payable. The taxable amount = €450,000/0.135 (i.e. the tax payable regrossed at 13.5%, in accordance with subsection (8)(a)).

Paragraphs (c) to (e) provide for a reverse charge mechanism in relation to the VAT payable, under which the recipient of the interest must account for the tax as if he or she made the supply.

(8)(c) The reverse charge arises where the person to whom the interest is assigned or surrendered is one of the following:

• an accountable person,
• a Department of State or a local authority, or
• a person who acquires the property for the purposes of making any of the following exempt supplies in the course or furtherance of business:
  • an exempt supply of property,
  • financial services,
  • exempt lettings of property - short term,
  • agency services in relation to, financial services,
  • insurance services,
  • public postal services,
  • public broadcasting services,
  • passenger transport.

Where the person or entity acquiring the interest under the reverse charge is not registered for VAT, that person or entity must register for VAT in respect of that transaction.

(d) Where the State or a local authority acquires an interest subject to the reverse charge, it is accountable and liable regardless of the provisions of section 14(2) relating to the tax treatment of public bodies.

(e) The surrender or assignment of an interest in property is treated as a supply of goods by the recipient.

However, the person who makes the surrender or assignment continues to be entitled to deductibility as if he/she made a taxable supply of the goods. Such a person is obliged to issue a document to the recipient of the property setting out the taxable value of the surrender or assignment and the amount of VAT involved. The reason for this requirement is that, once the transaction is treated as a supply by the recipient, the person who makes the surrender or assignment would, in the absence of such a requirement, no longer be obliged to issue a full VAT invoice.

(9)(a) Where a legacy lease is assigned or surrendered to a taxable person, then the person who makes the assignment or surrender must issue a document to the person to whom the interest is assigned or surrendered, showing the amount of tax due and payable and the number of intervals remaining in the adjustment period. (The person who takes the assignment /surrender is responsible for the VAT on a reverse charge basis under subsection (8).)

(9)(b) Where subsection (9)(a) applies, the person to whom the interest in immovable goods is assigned or surrendered is to be regarded as a capital goods owner and the provisions of the capital goods scheme apply.

Example: In the example above, tax due = €450,000 and intervals left = 9. Z, who has taken the assignment/surrender, is the capital goods owner.

(10) Where a person who has elected to register in respect of a holiday home wishes to cancel that election, the “old rules” (as opposed to the capital goods scheme rules) continue to apply, provided the holiday home is owned by that person on 1 July 2008 and is not further developed after that date.

(11) In general, the capital goods scheme does not apply to transitional properties and legacy leases.

(11)(a) It does, however, apply to refurbishments that are completed after 1 July 2008.

(11)(b) It also applies on or after 23 February 2010 to transitional properties and legacy leases in a “big swing” situation (i.e. where there are big (more than 50%) changes in taxable/exempt use). If a transitional property on which deductibility has been claimed is put to exempt use, then a once-off adjustment is made under that scheme with a clawback of part of the VAT that was deducted. If the company subsequently puts that property to a taxable use, a once-off adjustment is made to claim back the appropriate amount of VAT.

(12) The various capital goods scheme definitions are applied, as appropriate, for the purposes of the transitional measures.

• (12)(a) An interest in goods covered by the section is treated as a capital good.
• (12)(b) The person holding the interest is the capital goods owner, but a person holding the reversionary interest in a legacy property is not the owner if he/she didn’t develop the goods.
• (12)(c) The adjustment period for transitional properties and legacy leases is as follows:
  • (12)(c)(i) Acquisition of the freehold/freehold equivalent – 20 years from date of acquisition.
  • (12)(c)(ii) Creation of an interest – 20 years, or number of full years if less than 20.
  • (12)(c)(iii) Assignment/surrender of an interest before 1 July 2008 – 20 years, or time left, if less than 20 years.
  • (12)(c)(iv) Surrender/first assignment of an interest after 1 July 2008 – number of full years remaining in the adjustment period (calculated under (ii) or (iii) plus 1.
  • Second or subsequent assignment after 1 July 2008 – number of number of full years remaining in the adjustment period (calculated under first assignment) plus 1.
• If the goods were developed since the acquisition/creation of the interest, the adjustment period is 20 years from the most recent development except where that development constitutes a ‘refurbishment’ for VAT purposes.
• (12)(d) The tax chargeable on the acquisition/development is the “ total tax incurred” under the CGS.
• (12)(e) The “base tax amount” is the total tax incurred divided by the number of intervals.
• (12)(f) An “interval” is each year in the adjustment period.
• (12)(g) The “initial interval” is the first 12 months.
• (12)(h) The “second interval” is the second year, or the normal CGS second interval in the case of an assignment/surrender on or after 1 July 2008.
• (12)(i) The “subsequent interval” means each of the following years.
• (12)(j) The “total reviewed deductible amount” is the total tax incurred (see subsection (12)(d)) less specified non-deductible amounts incurred before 1 July 2008, etc.
• (12)(k) The “non-deductible amount” is the tax incurred (paragraph (d)) minus the amounts that are not deductible (paragraph (j)).

(13) Subsection (13) deals with properties acquired after 1 July 2007. The taxable person is required to make an adjustment under the capital goods scheme. However, this requirement is set aside if an adjustment has already has been made under section 61(7) (apportionment for dual use inputs). This ensures that a taxable person is not obliged to make two adjustments for the property.

(In this context, note that section 61(7) now only applies to moveable goods and not immovable goods; before the introduction of the CGS on 1 July 2008 it applied to both.)

Relevant Date: Finance Act 2020