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| VAT on Property – Topical Issues |
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| Self-supplies of property |
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Finance Act 2005 introduced the concept of deductibility adjustment where this is a self-supply of a property. Typically a self-supply occurs where a taxable person diverts a property to exempt use by granting a lease of less than ten years, without waiving exemption.
Prior to Finance Act 2005 a self-supply of a property resulted in the taxable person paying over to the Revenue Commissioners all of the VAT which he recovered on the purchase and/or development of the property. The change in the legislation means that the taxable person retains VAT input credit for the time during which the property was used for taxable purposes. For this purpose a property is regarded as having a maximum VAT life of 20 years.
Where there is a subsequent disposal of the self-supplied property VAT arises on the disposal. On disposal there is a further deductibility adjustment which means that the taxable person obtains additional VAT input credit by reference to the remaining 20 year VAT life of the property. |
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| Disposals of reversionary interests |
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Finance Act 2005 clarified to a certain extent the VAT treatment of the disposal of reversionary interests in property. The sale of a freehold/long leasehold subject to a long lease is a supply of a reversionary interest. The supply of a reversionary interest is exempt from VAT provided there has been no development of the property “by, on behalf of, or to the benefit of,” the person disposing of the reversionary interest, since the grant of the long lease.
While there is provision in the legislation for the Revenue Commissioners to make regulations specifying when the development is not treated “as being made on behalf of or to the benefit of a person” no such regulations have been made as yet.
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| 10% rule |
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| The 10% rule operated by the Revenue Commissioners is a simplification rule to enable a person making a disposal of a property to disregard minor outlay on development work when determining whether the property has been developed since 1 November 1972. Where the development work on the property since 1 November 1972 is less than the lower of the following: |
 | 10% of the amount on which VAT would be chargeable if the property was regarded as developed, or |
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| €300,000 |
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The person making the disposal may treat the supply as being exempt from VAT.
There are certain conditions which must be satisfied for this simplification rule to apply. It should be noted that it does not apply where there has been an essential change in the use of the property or where land has been adapted for materially altered use due to any engineering or other operation in, on, over or under the land.
The use of the 10% rule is at the option of the person making the supply of the property.
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| Use of the VAT 4A procedure |
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The Revenue have indicated that they will allow the use of the VAT 4A procedure where the lease is signed and/or occupation has occurred after the receipt of the form VAT 4A by the landlord’s Revenue District but before clearance in the form of a VAT 4B has issued.
To ensure the landlord can recover the VAT arising on the grant of the lease from the tenant in the event that the Form VAT 4B is not issued by the Revenue, the standard VAT clause should be retained in the lease.
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| Economic value test |
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The economic value test introduced in the Finance Act 2002 should be considered in every case involving the creation, assignment or surrender of a lease. In particular it should be borne in mind where, on the assignment or surrender of a lease, the assignee or the landlord has to account for the VAT arising under the reverse charge mechanism.
Finance Act 2005 imposes a requirement on the tenant/assignor to issue a document showing the value of the interest and the amount of VAT arising on the surrender/assignment of the lease.
The economic value test does not apply to disposals of freehold interests. The Revenue have stated that they are prepared to treat the disposal or creation of long leases for a period of at least 99 years for a premium plus a peppercorn rent in the same way as a disposal of a freehold interest and therefore not subject to the economic value test.
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| VAT multiplier |
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| One of the methods used to value a long lease for VAT purposes (i.e. a lease of at least 10 years) is the multiplier which is based on certain issues of Government Stock. The current multiplier is 21.27. |
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| Retention of VAT records |
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The 2003 Finance Act extends the obligation on a person holding a taxable interest for VAT purposes in a property to retain the VAT records relating to the acquisition and/or development of the property for the period of ownership plus a further six years.
It should also be noted that where a person elects to waive the exemption applying to rents from short lettings that person is obliged to retain the VAT records relating to the property for the period in which the waiver is in place plus a further six years.
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| Disposals of property which are exempt from VAT |
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It should be noted that where the disposal of a property is exempt from VAT, e.g. where the property has not been developed since 1 November 1972, it is not possible to recover the VAT incurred on associated costs such as legal and auctioneer’s fees.
This memorandum is intended for general guidance only. Specific professional advice should be taken prior to taking any action in relation to any matter out lined in this memorandum. |
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