New VAT on Property Rules

The Finance Act 2008 introduced new rules relating to the VAT treatment of property transactions which commenced on 1 July 2008.

These new rules have been introduced to completely replace the current VAT on property system and aim to exempt most property transactions from VAT but with an option to tax the transaction in certain circumstances.

The new legislation will affect the following:

• Sales of commercial property which close on or after 1 July 2008.

• Sales of residential property which close on or after 1 July 2008.

• Leases of property which come into force on or after 1 July 2008.

• Long leases of property (i.e. leases for 10 years or more) which are currently in place but where the term of the lease does not expire until on or after 1 July 2008.

• Waivers of exemption in place on 18 February 2008 and not cancelled before 1 July 2008.

A new Capital Goods Scheme (CGS) is also being introduced.

SALES OF COMMERCIAL PROPERTY ON OR AFTER 1 JULY 2008

New Buildings

From 1 July 2008 VAT must be charged on the sale of a property at the 13.5% rate where the property is considered “new”. The property will be considered “new” in the following circumstances:

• The first supply of a completed property within five years of its completion.

• The second and subsequent supply of a property, if the supply is made within five years of completion, and the building has been occupied for less than two years.

Second Hand Buildings

The supply of second hand buildings which were developed before 1 July 1988 will be outside the VAT net (provided the property was not redeveloped in the meantime).

The supply of all other second hand buildings is exempt from VAT however the seller and the buyer may jointly opt to tax the sale of the building. If the joint option to tax is not exercised, the vendor will suffer a claw back (time apportioned to reflect the remaining VAT life of the property) of the VAT previously recovered on the acquisition or development of the property.

SALES OF RESIDENTIAL PROPERTY ON OR AFTER 1 JULY 2008

Where the property is residential the first supply of the newly completed property will always be liable to VAT regardless of when it is supplied and of what use the supplier has put the property to prior to the supply.

LEASES ON OR AFTER 1 JULY 2008

It is important to note that the point or time of supply for VAT purposes is usually the earlier of the date the tenant takes occupancy or the date the lease is signed.

The pre 1 July 2008 distinction between long term and short term lettings has been discontinued. Under the new system all lettings are exempt from VAT. However the landlord still has the option to tax the letting and charge 21% VAT on rents. If the joint option to tax is not exercised, the landlord will suffer a clawback (time apportioned to reflect the remaining VAT life of the property) of the VAT previously recovered on the acquisition or development of the property.

The option to tax will never be available on lettings of residential property and will no longer be available on lettings between connected parties unless the tenant can recover at least 90% of the VAT charged on the rents.

LONG LEASES IN PLACE BEFORE 1 JULY 2008

Long leases, currently in place, but where the term of the lease does not expire until on or after 1 July 2008, may be assigned or surrendered on or after 1 July 2008. The assignment or the surrender will be chargeable to VAT if the tenant who is making the assignment or surrender was entitled to some VAT recovery on the acquisition of the lease or the development of the property (time apportioned to reflect the remaining VAT life of the property). The VAT will then be accounted for under the reverse charge mechanism.

WAIVERS OF EXEMPTION – CONNECTED PARTIES

If an existing waiver of exemption in respect of short term lets is in place between connected parties (with 21% VAT being charged on rents) and the tenant is not allowed to recover at least 90% of the VAT charged on the rents the waiver of exemption automatically ceased on the 1 July 2008. If the waiver ceased the landlord must repay to the Revenue Commissioners the difference between the VAT recovered on the purchase and development of the property and the VAT already paid over to the Revenue Commissioners on the rents.

However, if the following conditions were met before 1 July 2008 the waiver of exemption will not be cancelled:

• Waiver was in place by 18 February 2008.

• Letting was in place by 18 February 2008.

• The rents are adequate to account for a certain amount of VAT each year which ensures that the VAT initially recovered on the purchase and development of the property is repaid to the Revenue Commissioners over a 12 year period, beginning on the date of first letting. This is calculated using a prescribed formula.

Therefore if you currently let a property on a short term letting along with a waiver of exemption in place, with a connected party, it is extremely important to seek advice.