VAT Considerations

Kevin Devenney, Grant Thornton

Introduction

VAT as a transaction based tax has and continues to be a key consideration in any corporate transaction given the risk of inheriting legacy VAT liabilities or indeed VAT costs post transaction. The latter is particularly true when it comes to VAT on Property transactions given the revised application of Transfer of Business relief. While there are various other areas of VAT which require careful consideration before entering into any transaction I believe VAT on Property is particularly relevant given the current economic landscape. Considering this I will focus on the following areas:

• Overview - VAT on Property

• Transfer of Business

• VAT Recovery - property transactions

Overview - VAT on Property

Capital Goods Scheme

The Capital Goods Scheme (CGS) is a key component of the new VAT rules. Under the new rules, each property has a “VATable life” or “adjustment period” of either 10 or 20 years. The adjustment period is 20 years in the case of a new development, or 10 years in the case of a refurbishment (as defined). It is possible for a property to have a number of separate adjustment periods attaching to it - for example, where the property was completed and subsequently redeveloped or refurbished over a period of time. In effect, once a taxpayer acquires or develops a property and incurs inputs, the taxpayer may recover the VAT inputs immediately provided that the property is put to a VATable use. The CGS divides the inputs reclaimed and refunded into the relevant number of intervals. In the case of a new build there are 20 intervals representing each year of the adjustment period for that property. In the case of a refurbishment there are 10 intervals. The initial interval runs from the date that the property was completed or acquired to 12 months from that date. The second and subsequent intervals run from the anniversary of this date. The importance of the initial interval is that it is used as a benchmark against which the VAT usage in all the subsequent intervals is measured.

Sales of Property

For the purposes of applying the specific rules, the starting point should be to determine whether the property is developed or not. As you will know “development” is defined under VAT law and is given a very broad definition. If the land is undeveloped it is exempt from VAT. However, the supplier and the purchaser can exercise a joint option to treat the supply as VATable. This has the natural consequence of protecting the past for the vendor where the purchaser would account for VAT on the reverse charge basis. It must be exercised by the 15th of the month following the month in which the disposal occurred.

Where the purchaser is entitled to full recovery, you might think that opting to tax needs no further consideration is needed. However, even where the purchaser has full VAT recovery, the decision to jointly opt to tax is not as straightforward as it may at first seem. Further consideration should be given to;

  • Bringing an otherwise VAT exempt property into the VAT net
  • The purchaser having to monitor the usage of the property for the next 20 years or until sold
  • The purchaser having an exposure to VAT costs for any VAT exempt use of the property over the next 20 years
  • If the purchaser wants to sell at any time in the next 20 years he/she will have to get the purchaser from him to agree to a joint option to avoid a VAT cost

Lettings - Taxable and Exempt

All lettings of property post 1 July 2008 are prima facie VAT exempt. The treatment applicable to the letting of commercial and residential properties differs.

Commercial lettings are exempt but a landlord can exercise an option to tax the letting. This is subject to restrictions in the case of connected tenants or connected occupiers where there is less than 90% input VAT recovery i.e. it is not possible to opt to tax a letting to a connected tenant or a connected occupier where that tenant or occupier have an input VAT recovery rate of less than 90%. Where the option to tax is exercised, the landlord is required to account for VAT on the rental income. Opting to tax a particular letting, gives the landlord an entitlement to input VAT credit in relation to the development or acquisition costs of acquiring that property.         

Whilst residential lettings are also exempt from VAT, it is not possible to opt to tax the letting. This was an extension of rules pre April 2007. As a consequence, there is no entitlement to input VAT recovery on development or acquisition costs or on costs relating to the letting.

The letting of student accommodation falls to be treated as a residential letting and the same VAT treatment as outlined above applies.

Lettings in the holiday sector attract an entirely different VAT treatment in that such lettings are automatically subject to VAT (assuming the registration threshold for services is breached). Regulation 46 of the VAT Regulations 2010 provides a specific definition for such lettings "a letting which constitutes a letting that is provided in the short-term guest sector or holiday sector for the purposes of paragraph 11(a)(ii) of Schedule 3 to the Act is a letting of all or part of a house, apartment, or other similar establishment to a tourist, holidaymaker or other visitor for a period which does not exceed or is unlikely to exceed 8 consecutive weeks..."

It is clear from the Regulation that lettings in the hotel and guest accommodation sector, B&B sector and also Airbnb fall within the scope of VAT. Where a provider of such accommodation breaches the registration threshold for services (currently €37,500) there is a requirement to register and account for VAT at the appropriate rate (13.5%). As the provision of these services is liable to VAT, the provider is entitled to reclaim VAT on associated costs. The grant of a license for VAT purposes is prima facie subject to VAT at the standard rate of VAT.

Transfer of Business

Transfer of business relief (TOB) has become very topical since the changes to Revenue's guidance on the topic which broadened the scope of sales of let property. It is certainly a more straightforward VAT treatment from a vendor's perspective as there is no requirement to charge VAT and no negative CGS claw-back issues generally arise. Conversely a purchaser should take due care particularly where the property is acquired at auction or as a result of a forced sale.

There is a sense that once a purchaser can register for VAT, there is less risk for the vendor (except in cases where the TOB sale follows the surrender of a legacy lease). However, it is not as clear-cut as that and incorrectly registering for VAT prior to acquiring a property can lead to some unexpected VAT costs for the purchaser.

Under VAT legislation, s20(2)(c) VAT Consolidation Act 2010 (“VATCA”) as amended provides that the transfer of ownership of goods;

"being the transfer to an accountable person of a totality of assets, or part thereof, of a business (even if that business or part thereof had ceased trading) where those transferred assets constitute an undertaking or part of an undertaking capable of being operated on an independent basis", shall be deemed for the purposes of this Act not to be a supply of the goods.

In summary, where an amalgam of assets of a business are transferring to a VAT registered person, and those assets enable the person to carry on a business on an independent basis, then it is not a supply for VAT purposes.

From the point of view of a vendor selling let property, the non-supply rule is extended to cover such supplies, once certain conditions are met. For VAT purposes, a business can include a letting business as the letting comprises the exploitation of the property for the purposes of obtaining income therefrom on a continuing basis (definition of economic activity as per the EU VAT Directive and definition of business as provided for in VATCA. So a vendor selling a let property is treated as selling his letting business as opposed to the single asset i.e. the property.

The key condition for TOB to apply is that the purchaser must be an accountable person. It is not necessary that they are an accountable person for the purposes of the transaction provided they are an accountable person otherwise. However it should be noted that a person who is VAT registered simply to account for VAT on a reverse charge basis in relation to goods (intra-Community acquisitions) or services (from abroad) is not treated as an accountable person for TOB. Ascertaining the correct VAT treatment at the time of sale is critically important.