FAQ’s - VAT on Property

Introduction

The new rules for VAT on property transactions came into effect on 1 July 2008. For full details of these new rules please see VAT on Property Guide on www.revenue.ie. Briefly, the rules can be summarised as follows:

• There are simplified rules for sales of property; sale of property is taxable for a maximum period of five years and exempt from VAT after that period. A joint option for taxation is allowed where the sale is exempt.
• Simplified rules for lettings of properties. The distinction between long and short leases is removed. All leases are now treated as an exempt supply of service. A landlord can opt to tax lettings subject to certain conditions.
• A capital goods scheme for property regulates VAT deductibility in relation to a property over the “life” of a property, which in most cases is twenty years.
• Transitional rules to deal with properties that were acquired before 1 July ensure that there is minimal disruption to the property market and that the disposal of such properties are subject to the new rules from 1 July.
• A number of anti-avoidance rules close down schemes that were used by connected persons to defer VAT payments over long periods.

Below is a collection of replies to frequently asked questions in relation to the new VAT on property provisions that has been prepared by Revenue in response to questions that were submitted by the representative bodies on the TALC Indirect Taxes Sub-Committee.

1. At the end of April 2008 Revenue posted the New VAT on Property Guide. On 6 May 2008 Revenue posted a slightly different version of the New VAT on Property Guide. Can the Revenue explain the difference between the new version and the old version?

There were two changes:

• page 20, para 3.5 - addition of sentence “However....required”
• page 31, para 4.11 - addition of ...“or a legacy lease (see Chapter 3.7)”

2. Under Section 7A(1)(d)(iii) it is provided that a landlord’s option to tax is terminated where the landlord and the tenant become connected persons after the lease has been granted. Upon a strict reading of the legislation this applies whether or not the tenant has the ability to recover at least 90% of VAT on input costs.

Where a landlord and tenant become connected the landlord’s option to tax is terminated. However, if the tenant is entitled to at least 90% deductibility in relation to the VAT on rents, the option to tax may remain in place. Similarly if the tenant sub-lets the property to a person who is connected to the landlord, the landlord’s option is terminated. However, if the person connected to the landlord is entitled to at least 90% deductibility in relation to the VAT on rents, the option to tax may remain in place. Accordingly, in Example 17 VAT on Property Guide, the termination of the option would not arise if “C” has at least 90% VAT recovery entitlement.

3. Section 5(3B) provides for a blanket period of twenty years following the acquisition or development of the goods by the accountable person. This does not take account of the fact that the adjustment period will be twenty intervals and not twenty years, the adjustment period for a refurbished property is ten intervals and the adjustment period for a legacy lease or a property acquired under transfer of business rules could be any period but will inevitably be less than twenty years.

The provisions in Section 5(3B) deal with diversion to non-business or private use. These rules are independent of the CGS. The rules for adjusting deductibility in Section 12E relate to diversions to exempt use. Twenty years is the period over which the taxpayer must account for the VAT where a deduction has been taken and the property is subsequently diverted to a non-business use in accordance with Section 5(3B). The amount on which VAT is chargeable as a result of this supply is based on this same twenty-year period in accordance with Section 10(4D). See also Regulation 21B of S.I. No. 548 of 2006 - VAT Regulations 2006 (inserted by S.I. No. 238 of 2008 - VAT (Amendment) Regulations 2008).

4. The final paragraph of Chapter 3.18 VAT on Property Guide confirms that the existing practice as regards “shared services” (i.e. where a landlord passes on VAT on such services to tenant) is continued for legacy lease after 1 July 2008. Is this practice also extended to new leases created after 1 July 2008?

Yes this practice extends to such leases.

5. Where a tenant carries out a refurbishment in say year fifteen of a twenty-year lease and the lease expires at the end of the twenty years without being renewed, is the tenant responsible for a capital goods adjustment in respect of the refurbishment when the lease expires?

In the case described above there is no obligation on the tenant to make an adjustment since the lease simply expires. It is not assigned or surrendered. It should be noted that Revenue will examine cases where a tenant carries out a significant refurbishment approaching the end of the lease to see if in fact the refurbishment is for the benefit of the landlord and the issue of entitlement to input credit of the landlord, etc., would need to be considered.

6. What is the VAT treatment of a premium/reverse premium payable by the tenant to his landlord on the surrender/assignment of a legacy lease on/after 1 July?

The payment of a reverse premium to the landlord by the tenant on the surrender of a “legacy” lease is not taxable: it is considered outside the scope of VAT. The consideration for the assignment/surrender of a legacy lease is based on the CGS amount as per Section 4C(7). The position of premiums generally is set out in paragraph 4.11 of the VAT on Property Guide.

7. Where after 30 June a landlord makes a letting by way of an occupational lease to a tenant and exercises the landlord’s option to tax, what is the VAT treatment if the tenant then makes a sub letting of part only of the original property to a person connected with the landlord where the sub tenant does not have at least 90% VAT recoverability? Is the landlord’s option to tax terminated for the entire of the property let by the landlord or only in respect of part of it, namely the part occupied by the connected sub tenant?

Only the part occupied is effected by the termination of the option to tax. Section 12E(6)(c) has the effect of clawing-back the proportion of the landlord’s deduction that relates to the part occupied by the connected tenant.

7a. What is the position as regards charging VAT on such an occupational lease if, for example, 25% of the property was sub-let to a connected person with less than 90% recovery. The clawback would be based on 25% of the VAT recovered by the landlord. Would the landlord only charge VAT on 75% of the rent paid under the occupational lease?

Yes, the landlord would only charge VAT based on 75% of the rent charge to the main (unconnected) tenant. Please note that the apportionment of the rent between the taxable and exempt use would have to be made on a fair and reasonable basis. For example, if the ground floor represented 25% of the floor space but was more valuable in terms of the amount of rent receivable this would affect the amount of the claw-back under Section 12E(6)(c) and the corresponding amount of the rent subject to VAT.

8. Section 4C(11) provides that the adjustment period for an assigned or surrendered legacy leasehold interest in the hands of the assignee or person who makes the surrender is 20 years. The capital goods scheme operates by intervals. Can Revenue explain how the capital goods scheme will work in relation to an assigned or surrendered legacy lease?

Where a legacy lease is assigned/surrendered from 1 July onwards, the person who is assigning or surrendering the lease calculates the number of intervals remaining in the adjustment. This is calculated from Section 4C(11)(c).

The adjustment period for the new owner (assignee/landlord) is advised by the assignor/surrendering tenant per Section 4C(8)(b)(i), which will be the number of intervals remaining (being the number of intervals remaining in the latter’s adjustment period, including that in which the assignment/surrender takes place).

Section 4C(8)(b) provides that the assignee/landlord is a capital goods owner for the purposes of Section 12E. The initial interval runs for a full twelve months from the date on which the assignment and surrender occurs. The second interval (as per Section 12E) will end on the date of the end of the accounting year of the capital goods owner. (Example 1 in Appendix A illustrates how this operates in practice)

9. In Section 12E(3)(a) the adjustment periods for various classes of capital goods are set out. This sub section does not refer to shorter adjustment periods which will apply in the case of capital goods to which the transfer of business applies and legacy leases. The words “in all other cases 20 years” give cause for concern. Can the Revenue confirm that different periods than those set out in Section 12E(3) can apply in the case of properties transferred under transfer of business rules and legacy leases?

The adjustment period for legacy leases for the person who holds the interest on 1 July is provided for in Section 4C(11). For a person to whom a lease is assigned or surrendered post 1 July the adjustment period is provided for in Section 4C(8)(b)(i).

In relation to a transfer of business there are two separate scenarios. If a transfer of business occurs during the period where the property is considered “new” then the adjustment period is 20 intervals as per Section 12E(3)(a)(iii) for the transferee and the “total tax incurred” is the amount of tax that would have been chargeable on the transfer but for the application of Section 3(5)(b)(iii) as per Section 12E(3)(b)(ii).

If the transfer occurs outside the period where the property is considered “new” then Section 12E(10) provides that transferee will effectively “step into the shoes” of the transferor and must make adjustments for the remainder of the adjustment period as provided for in Section 12E(10)(c). Where the transferee’s accounting year ends on a different date to the transferor’s, the transferee may align the end of the CGS intervals with his or her end of accounting year. See Regulation 21A of S.I. No. 548 of 2006 - VAT Regulations 2006 (inserted by S.I. No. 238 of 2008 - VAT (Amendment) Regulations 2008).

10. Can a body that is considered outside the scope of VAT, such as local authority avail of the option to tax the sale of a transitional property under Section 4C(2)?

A local authority, or any other person or entity to the extent that their activities are outside the scope of VAT, cannot avail of the option to tax since they are not a “taxable person” and therefore do not come within the provisions of Section 4C which only applies to immovable goods acquired or developed by a taxable person. Similarly the CGS will not apply to such a person since it only applies to taxable persons.

11. When a person leaves a VAT Group and is either the landlord or the tenant of a person who remains a member, can the landlord avoid a deductibility adjustment by opting to tax the letting?

Yes, subject to the connected persons rule in Section 7A.

12. Does a CGS positive adjustment apply where a landlord has a short term letting pre 1 July 2008 without a waiver and opts to tax the letting on or after 1 July 2008?

A CGS positive adjustment is not provided for in these circumstances as transitional properties are not subject to the change of use provisions in Section 12E.

13. More clarification is needed regarding the meaning of “freehold equivalent” - What is the position of a lease for 50 years, for 70 years, for 80 years that do not fall foul of the “50% rule”?

The length of the lease is not of great importance. The amount of the payment and the nature of the payment(s) is the most significant issue. However, as a very general rule of thumb, leases of 75 years duration or longer are likely to be considered as “freehold equivalent”.

14. What is the position for a waived letting between connected persons (where the connected tenant is not entitled to at least 90% deducibility) where the VAT on the rents prior to 1 July satisfies the minimum test in the 12-year rule?

In such cases the landlord simply continues to charge VAT on the rents. The landlord must however ensure that the VAT on the rents continues to satisfy the minimum amount provided for in the 12-year rule.

15. What is the position for a waived letting between connected persons (where the connected tenant is not entitled to at least 90% deducibility) where the VAT on the rents prior to 1 July is less than the minimum amount provided for in the 12-year rule?

In such cases the waiver is cancelled with effect from 1 July. However, the landlord may increase the rents so that the VAT on the rents is at least equal to the minimum amount provided for the 12- year rule on 1 July. Rents will not have to apply on a monthly or bimonthly basis in order to satisfy the 12-year rule. However rent payable from 1 July 2008 should, irrespective of the period for which it is payable, be at such a level that when “annualised” the 12-year rule will be satisfied. The VAT on the rents, which meets the minimum amount, must be accounted for in the July / Aug VAT return.

It is important to note that the 12-year rule is subject to the landlord paying the resulting VAT liabilities on time. It is not a requirement that the tenant must have paid the VAT to the landlord.

Note - bad debt relief does not apply in such a case. See Regulation 16A of S.I. No. 548 of 2006 - VAT Regulations 2006 (inserted by S.I. No. 272 of 2007 - VAT (Amendment) Regulations 2007 as amended by S.I. No. 238 of 2008 - VAT (Amendment) Regulations 2008).

16. Will there be flexibility with the practical application of the CGS in regard to the first and second interval? For some businesses, the partial exemption calculation is a major task performed once a year - the application of the CGS would require partial exemption calculations throughout the year. Would it be acceptable to allow some flexibility in the timing of calculating the initial interval adjustment?

In practice this major task of calculating the partial exemption calculation is likely to be dealt with in Large Cases Division (LCD) and should be taken up by each business with LCD. In the majority of cases the proportion of taxable use should be readily identifiable by direct attribution. See paragraph 6.9 of the VAT on Property Guide. Revenue appreciate the practical application of the CGS may give rise in certain circumstances to some issues and some flexibility will be considered as these issues come to light.

For example, if the minimum VAT as calculated by the formula is €12,000 per year, the minimum amount for each taxable period is €2,000. Therefore €2,000 must be accounted for the in July/Aug VAT return.

17. Example 3 in the VAT on Property Guide would appear to relate to repairs not development. Can Revenue clarify the example?

Expenditure on repairs and renewals does not fall to be taken into account when calculating development expenditure. Example 3 in future editions of the Guide will be amended to enhance clarity.

18. Has the exclusion for supplies of immovable goods in the grouping provisions been removed?

The exclusion has not been removed. The grouping provisions do not apply to the supply of immovable goods.

19. Can a person who carries on an exempt business avail of the joint option for taxation and is such a person subject to the CGS?

Any person who carries on a business in the State (even an exempt business) is a “taxable person”. The joint option for taxation is allowed when the sale is between taxable persons. The CGS applies to properties where VAT was chargeable on the acquisition or development of that property to a taxable person. This should not be confused with a person or body who is involved in activities that are outside the scope of VAT. (See Q10).

20. In relation to Section 12E(8) - are paragraphs (b)(i) and (b)(ii) separate exclusions?

The conditions for the non-application of Section 12E(8)(a) set out in (i), (ii) and (iii) of Section 12E(8)(b) are not separate - they are cumulative. The taxpayer must satisfy the three conditions in order to avoid the CGS adjustment.

21. Does Section 12E(8) apply to “legacy leases”?

Yes. It is separate to the tax charge that arises on the assignment or surrender of a legacy lease under Section 4C.

22. Can Revenue confirm that, where a long lease that is subject to VAT is granted before 1 July 2008 (passing EVT, etc.) and the landlord then disposes of the reversionary interest in that lease after 1 July 2008 in circumstances where S.4(9) applies, the landlord will not suffer any CGS adjustment on that disposal of the reversion?

A CGS adjustment will not apply in these circumstances.

23. When does development constitute “refurbishment”? Is it subject to the 25% rule?

Refurbishment is a concept within the CGS. Whenever a person carries out a development on a previously completed building, this constitutes a refurbishment and essentially “creates” a capital good. The adjustment period for a refurbishment is ten intervals, the first of which begins when that refurbishment is completed. If a property is sold, the 25% test and the materially altered test apply to determine whether or not a property is “new”. For example, suppose a property was acquired in 1985 without VAT and developed at a cost of €1,000,000 + VAT €135,000 in Apr 2007 (the development was completed 5 July 2007). A further development was carried out in Jan 2008 (completed 18 Mar 2008) at a cost of €200,000 + VAT €27,000. Both developments constitute refurbishment and “create” two separate capital goods with ten intervals for each capital good. The adjustment period for the first capital good (development completed 5 July 2007) begins on 5 July 2007. The adjustment period for the second capital good (development completed 18 Mar 2008) begins on 18 Mar 2008.

If the property is subsequently sold, it is necessary to determine whether or not the sale is taxable or exempt. This means looking at all development carried out in the five years before the sale occurs. The property is sold in Feb 2009 for €4,000,000. The total cost of the development (neither of which materially altered the property) in the previous five years is €1,200,000. Since this is more than 25% of the consideration for sale the sale is taxable.

If the property had been sold for €6,000,000 the cost of the development would not breach the 25% rule and so the sale would be exempt. In order to avoid a CGS claw-back (separate claw-back for each capital good), the joint option for taxation would have to be exercised.

Note - if the property is not sold there are simply two capital goods - each with an adjustment period of ten intervals. Neither of these capital goods is subject to the annual adjustment provisions under the CGS since the development which “created” them was completed prior to 1 July 2008.

24. If a developer disposes of a holiday cottage after 1 July 2008, what are the VAT implications for the developer and the investor? Is the investor entitled to recover VAT on the purchase price and let the property to the management company as the letting of a holiday cottage is a taxable activity?

The position for such arrangements post 1 July 2008 is as follows. The developer charges VAT to the investor on the sale of the holiday home. As there is no distinction between long and short leases under the new system for VAT on property the granting of the lease from the investor to the management company is an exempt supply of a service. There is no entitlement to deductibility for the purchaser. However, the investor can choose to register for VAT and exercise the landlord’s option to tax in accordance with Section 7A and opt to tax the letting to the management company (assuming that the investor and the management company are not connected, or if connected the tenant is entitled to at least 90% deductibility). The investor must then charge VAT on the periodic rents to the management company at 21% over the term of the lease. The management company who are engaged in the provision of holiday accommodation are obliged to charge VAT at 13.5% (para (xiii)(b) Sixth Schedule) on the moneys received for providing the holiday homes to its customers.

25. Is VAT chargeable on the sale of commercial or residential “transitional” property post cancellation of waiver after payment of cancellation sum?

Generally no VAT due on sale but see Tax Briefing 64 in respect of sales by a developer / builder - otherwise no change in treatment intended under new rules.

26. Can a waiver of exemption be backdated to a letting that commences prior to 1 July 2008?

Yes, providing all the normal criteria as provided for in Regulation 4(4) VAT Regulations 2006 are applicable, e.g. tenant must be entitled to full deductibility, a waiver may be backdated in respect of an individual letting. The backdated waiver will not extend to any of the landlord’s other lettings.

27. Where a property, in which there is a short-term letting that is subject to a waiver, is sold and the sale is subject to VAT Revenue have traditionally allowed the amount of VAT charged on the sale be included in the “tax paid” for the purposes of the cancellation adjustment. Will this practice continue for waivers that are cancelled after 1 July?

Yes, this practice will continue where VAT is chargeable on the sale of a property and the waiver is subsequently cancelled.

28. A landlord creates a 25-year letting in a property on or after 1 July and the landlord’s option to tax is exercised. Two years later the landlord sells the property. Can the transfer of business relief in Section 3(5)(b)(iii) apply to such a situation where the purchaser will continue to apply the landlord’s option to tax?

Yes the transfer of business relief can apply where a landlord sells a property in which there is a sitting tenant and where the purchaser (landlord 2) will continue with the landlord’s option to tax and charge VAT on the rents to the sitting tenant.

29. A landlord has two properties that are let short-term and are subject to a waiver of exemption on 1 July 2008. In December 2008 the landlord wises to cancel his or her waiver of exemption. Can he or she cancel in respect of just one of the properties?

No, the normal waiver cancellation rules as contained in Regulation 4 of S.I. No. 548 of 2006 - VAT Regulations 2006 apply and the cancellation amount must be calculated in respect of both properties.

30. What is the VAT treatment of a premium / reverse premium payable by a landlord to a tenant or a tenant to a landlord on or after 1 July in respect of leases created prior to 1 July?

There are essentially four possible scenarios -

1. Long lease created prior to 1 July on which VAT was chargeable when created.
2. Long lease created prior to 1 July on which VAT was not chargeable when created.
3. Short lease created prior to 1 July where waiver of exemption did not apply (i.e. exempt lease).
4. Short lease created prior to 1 July where waiver of exemption did apply (i.e. landlord charges VAT at 21% on the rents).

In respect of (1) the VAT chargeable on the assignment or surrender of the lease is restricted to the amount specified in Section 4C(7). (See question 6 above)

In respect of (2) and (3) no VAT is chargeable on the assignment or surrender of the lease in such cases.

In respect of (4) VAT is chargeable at 21% the payment on the assignment or surrender of the lease is linked to the taxable waived letting.

Note - the treatment of premiums and reverse premiums on leases created on or after 1 July is explained in paragraph 4.11 VAT on Property Guide.

Appendix A

Example 1 - CGS intervals for legacy leases

Mr X grants Ms Y a 35-year lease on 1 July 2000. VAT is charged on the capitalised value of the lease of €1 million. Ms Y is still the tenant (and so has the ‘interest’ in the property on 1 July 2008.) The adjustment period for the legacy lease for the person who holds the legacy on 1 July 2008, i.e. Mr Y, is 20 years from 1 July 2000. (This is determined from Section 4C(11)(c).

On 15 April 2012 Ms Y assigns the lease to Mr J. The assignment is taxable, on the reverse charge basis, as it occurs within the 20-year adjustment period. VAT charged on the assignment is calculated as follows -

The assignment is reverse charged which means that Mr J is liable to account for VAT of €450,000 on the supply in his Mar/Apr 2012 VAT return. Ms Y must issue a document to Mr J which contains-

• The amount of tax due on the assignment (€450,000)
• The number of intervals remaining in the adjustment period at the time of the assignment, which is in this case is 9 intervals.

Section 4C(8)(b) deems Mr J to be a capital goods owner for the purposes of Section 12E. Therefore, the interest that he owns is subject to the annual adjustments and all the other rules in the CGS. The number of intervals in the adjustment period for the person to whom a legacy lease is assigned or surrendered after 1 July 2008, is determined by Section 4C(8)(b)(i). For Mr J it is 9 intervals. The initial interval for Mr J begins on 15 April 2012 and end on 14 April 2013. Mr J’s accounting year ends on 31 December. The second interval for the interest will begin on 15 April 2013 and end on 31 December 2013. Mr J must make any adjustments required under the CGS until the end of the adjustment period (9 intervals) the last of which will end on 31 December 2020.