introduction to the new vat on property system ronan o’grady bbls (european), aiti)

Introduction to the New VAT on Property System

Ronan O’Grady BBLS (European), AITI)

The Practice

Is located on the 4th Floor, 8-34, Percy Place, Dublin 4.

The mission of the practice is to provide legal and practical solutions to our clients’ problems.

The Practice

Our firm has a strong commercial emphasis and is dedicated to providing clients with a fast efficient and reliable service constantly adapting to meet with diverse requirements in a rapidly changing and increasingly complex environment.

The Practice

Our focus is aimed towards the solution of client needs in the most practical and constructive manner possible.

The Practice

VAT – Basic Principles

1. The Common System of VAT

2. The Objectives of the New System

3. Taxable and Accountable Persons

4. Connected Person

5. Freehold / Freehold Equivalent Interest

6. Deductibility Adjustment

7. Development

8. Adjustment Period

9. Completed and Occupied

10. Escaping the VAT Net

11. Taxable Sales of Property

12. Leases and VAT – Overview

13. Capital Goods

VAT – The Basics

Applies on the supply of taxable goods and services

No sticking VAT for fully accountable persons – (they can reclaim it)

VAT is absorbed by businesses (banks, insurance companies etc.) engaged in exempt activities and private individuals

The Common System of VAT

Along with other EU Member States, we areobliged to apply the “Common System ofVAT” – but prior to 1st July, 2008:

We taxed certain occupational leases as a supply of goods - for all other EU States, leasing is a taxable service.

We did not allow time apportionment of VAT according to taxable usage for capital assets – a capital goods system

Example

In June 2006, a bank buys a new property for €20m plus VAT of

€2.7m. In April 2008, it sells it for €23m. The bank will get no

credit for the VAT incurred in 2006. In other EU Member States

the Bank could claim a refund of the 2006 VAT reduced on a time

apportioned basis.

How? On a ten year VAT Life from date of purchase it

might get 8/10 back based on a remaining 8 years of that 10 year

VAT Life and on a 20 year VAT Life it could reclaim 18/20 or

9/20

The Objectives of the New System

To regularise VAT on the leasing of property

To provide a capital goods system for property in the VAT Net

To move our system closer to the common system of VAT

New concepts for the New System

The new system is based on an array of new concepts. Some are relatively simple, others are very strange in an Irish context.

Some are defined, others must be labelled so they can be identified.

Taxable Person / Accountable Person

From the 1st of July, 2008;

A “Taxable Person” is a person engaged in economic activity (including exempt activities for VAT purposes)

An “Accountable Person” is a person who is obliged to register and account for VAT

Many vendors and purchasers of property and landlords may find that they are obliged or encouraged to register for VAT

Solicitors/Accountants must be able to advise them accordingly

Connected Person

Very widely defined linkage for anti avoidance including relations, partners, common controlled companies, trustees, settlors, beneficiaries are used in determining whether a sale of developed property is mandatorily taxable and to deny a landlord the right to charge VAT on an occupational lease in certain circumstances.

Freehold / Freehold Equivalent Interest

Freehold – Self Evident

A Freehold Equivalent Interest - is a lease which bestows effective economic ownership of a property (an ownership lease).

Contrast this with an occupational lease which is a lease of property under which the rent is merely a payment for the use of the property let.

Why is the distinction significant? Because the consideration of the grant of a lease which is a Freehold

Equivalent Interest may be taxed as the supply of immovable property (13.5%) and the consideration for the grant of an occupational lease may be taxed as a service (21%)

“Completed” and ”Occupied”

“Completed” means the development of the property has reached such a state, apart from any finishing or fitting out works, that the property can be used for the purposes it was designed and the utilities and services required are connected.

“Occupied” means occupied and fully in use following completion and where the property is let, occupied and fully in use by such tenant

The dates these occur are part of the VAT history of a developed property.

Deductibility Adjustment

A Deductibility Adjustment is a recalculation of the VAT liability of a property owner triggered by an event, such as an exempt sale or a letting where the option to tax is not exercised or change of taxable use.Final deductibility adjustment applies on a time apportioned basis over the VAT life or the property.An interval deductibility adjustments can apply in respect of that interval only.A deductibility adjustment can be in favour of the Revenue or of the tax payer.

VAT, Property and Development

As a general rule, the supply of a property is not taxable

unless it has been developed or acquired in a developed

condition. A property is developed for VAT purposes if

it has undergone: Construction works on a building (generally 4 walls

and a roof); or Operations to effect material change of use.

Under the new system “Refurbishment“ is defined as “development to a previously completed Building”.

Examples of Undeveloped Property

The sale of a Greenfield site (unless services are laid to it or it is sold in conjunction with a development agreement); or

An old building, such as a Georgian building, which has not been the subject of construction work or engineering or other operations to effect a material change of use.

Adjustment Period

The period of 20 intervals (20 years approximately) since the date a property was developed; or,

If acquired after development, subject to a right to claim VAT on the acquisition, the period of 20 intervals (20 years approximately) from that acquisition

If refurbished (and held by the refurbisher), the period of 10 intervals (10 years approximately) from the refurbishment.

Examples of Developed Property

The sale of a newly completed office block.

The sale of an old building which has been subjected to works to effect a materially changed use such as where an old warehouse has been converted to shop units.

But a developed property does not stay taxable forever.

Development – Period 1

The old cut off date of 31st of October, 1972 is gone

This liberates quite a number of properties which were regarded as being in the VAT net on 30th of June, 2008.

Cut off or the adjustment period is decided on the basis of new rules

Taxable Supplies of Property (1)

After the 30th of June, 2008, only the

following are mandatorily taxable at 13.5%:

New Residential property sold by a developer after the 30th of June, 2008.

New Commercial property sold by a developer after the 30th of June, 2008 and within five years of development

Taxable Supplies of Property (2)

Commercial property sold by the owner within five years of development at any time until the property:

Has been occupied for at least two years; and

Since development has been the subject of at least one arms length sale. (sales between commercial persons are ignored)

These types of property are called New or Nearly New

Example

In July, 2008, a factory is completed. It is

sold on the 1st of August, 2008. The sale is

mandatorily taxable at the 13.5% rate. On

the basis that from the 1st of August, 2008 it

is occupied on a continuous basis, any

further sales until the 30th of June, 2010 will

also be mandatorily taxable.

What Happens Then?

What do we call property which is not new

or nearly new but still can have between 15

and 18 interests on years in its adjustment

period?

The best title for it is the “UNNEW”

Example

On the 1st of July, 2008, an office is completed. It is sold to an accountable person on the 1st of August, 2008 and occupied until the 1st of January, 2011 (2½ years after completion). It is no longer new or nearly new but rather “unnew”.

For what special treatment is an “unnew” property singled out?

Exempt with Option to Tax (1)

This bland but misleading named concept

can give trouble

We christen it.


EWOTT!


If you do not exercise the option to tax on the sale of “unnew” property you may suffer a Deductible Adjustment.

VAT claimed on acquisition or development reduced on a time apportioned basis will be clawed back by way of deductibility adjustment.

Example (1)

In 1997, a property was developed at a cost of €10m PLUS vat of €1.35M. The VAT is reclaimed and the property is used continuously for fully taxable purposes. If it is sold in July 2008 (after 11 intervals) and the option to tax is not exercised, the seller will have a debit deductibility adjustment of €0.65m.

Effectively the seller is penalised under the capital goods system for VAT attributable to the residue of the adjustment period.

Example (2)

But there is a solution!Exercise the joint option to tax the sale. If the option is validly exercised the purchaser self accounts for VAT and the vendor is of the hook. Be sure it is exercisable- Both vendor and purchaser must be taxable

persons.- Purchaser must register and account for VAT

Out of Scope

After unnew (that is after the Adjustment

Period has expired) a property is out of

scope (old). Any sale is free of VAT.

Out of Scope – Diagram of Adjustment Period

The Life of a Developed Property

20 years approximately

—————————►

The Life of a Refurbished Property

10 years approximately

—————————►

New Nearly New “Unnew” Out of Scope

New Nearly New “Unnew” Out of Scope

Leasing and Letting

The old Capitalised value system for taxing leases is gone.

The letting of a property under an occupational lease is an exempt service for VAT purposes and is also subject to a landlord’s option to tax at 21%.

Leasing and Letting

Example:

Lease of new unit in shopping centre granted on the 30 th

of June, 2008. VAT is charged on capitalised value.

Contrast this with a lease of a new unit in a shopping

centre granted on the 1st of July, 2008. If LL opts to tax,

VAT is charged at 21% on rent. If LL does not opt to

tax, LL must repay VAT on input costs on acquisition

or development of the unit.

Assignment / Surrender of Occupational Lease

This is one of the features which solicitors/Advisors will find bizarre.

Is it a supply of immovable goods or the supply of a service?

Answer – generally it is the supply of a service, the tax rate can be 21% of the Consideration payable. By way of exception, Assignments and Surrenders of certain Leases still in the VAT net on the 1st of July, 2008 known as “Legacy Leases” are taxed as the supply of immovable goods in accordance with a formula.

Conditions of Sale under the New Regime – Acting for a Vendor

Generally, vendors and their advisors are cautious people.

They feel that it is safer to charge VAT even if there may be a chance that it does not apply

This may be unsafe and is unlikely to satisfy a diligent purchaser.

Conditions of Sale under the New Regime – Acting for a Vendor

Have presentable VAT records when drafting the contract. You must identify the VAT status of property Remember the supply of a freehold equivalent lease is a sale

of immovable goods. The sale of an occupational lease can be taxable at 21% on the

premium. Is your client a taxable person? Is your client an accountable person? Does your client have partial deductibility? Is the purchaser a taxable person? If not, the option to tax the

sale of unnew freehold/freehold equivalent is not available.

Conditions of Sale under the New Regime – Acting for a Purchaser

Make sure you review the VAT records and satisfy yourself that the VAT treatment is appropriate.

Identify the VAT status of the property. Is your client a taxable person? Is your client an accountable person? Does your client have partial deductibility? Will the property be used by the purchaser for wholly taxable

activities? Does the VAT burden actually fall on your client? Could the VAT conditions be changed to suit your client? Register for VAT if option to tax exercised.

Occupational Lease Terms – Acting for a Landlord

Consider: Exercise Landlord’s option to tax and oblige tenant to pay VAT

on rent Right to cancel and opt to charge VAT on rent Prohibition for VAT on assignment to connected person. Indemnity against VAT triggered by unwitting use of property

by connected person where the VAT deductibility ratio is less than 90%

Prohibition on use with less than 90% VAT recoverability by connected person.

No responsibility taken (unless agreed) for tenant’s VAT on refurbishments.

Register for VAT

Occupational Lease Terms – Acting for a Tenant

VAT invoices to be issued for each payment of VAT on rent.

Date adjustment period ends to be advised. If refurbishment is to take place, look for

Landlord to take responsibility for VAT on surrender.

Reward for the Vigilant Tenant

Landlord’s adjustment periods are finite. If a tenant with partial deductibility knows the date of expiration of his Landlord’s adjustment period, he can ask his Landlord to cancel the option to tax the lease on that date. No VAT will then apply on the rent. He may ask for an option to pay the Landlord to cancel when the VAT cost to the Landlord is low. Tax trap for Landlord if property is still new or nearly new.

Consider the Use

Example:A bank supplies both taxable and exempt services form an old building. Due to expansion of its business, it will acquire a new office block after the 30th of June, 2008. If it moves its exempt services operations to the new office it will suffer irrecoverable VAT on the acquisition, however, if it moves its taxable services to the new office, it stands to recoup VAT on the acquisition of the new office – 13.5% is a very significant saving.

Watch for the Tax Traps

If a vendor is selling “unnew” property and

fails to exercise the option to tax, he will

suffer a clawback of VAT on the sale.

Plan Ahead

Include VAT planning in any strategy for the

sale, purchase or leasing of property. If you

wait until after a transaction has been

agreed, planning for VAT may no longer be

an option.

Reading Material

1. Revenue VAT on Property Guide

2. Revenue FAQ

3. Tax Briefing No. 69

4. Law Society VAT Special Conditions

5. Key to VAT on Property Transactions (Law Society Gazette October, 2008)

In Conclusion

Tax Planning The most revolutionary change in VAT on

property since VAT was introduced in 1972. There will be many tax planning opportunities

and many tax traps, especially for exempt and partially exempt businesses.

Solicitors/Advisors who ignore VAT do so at their peril.

Slides give a general picture not necessarily comprehensive in a particular situation.

Appendix 1- Tables and Checklist

Table 1: Sale of Freehold/Freehold Equivalent Interest of Assignment/ Surrender of Legacy Lease where VAT is Mandatorily Chargeable at

13.5%

Property Sold Tax Status Vendor Must

Purchaser Must VAT Calculated By Reference To

deductibility Adjustment For

Vendor

Relevant VAT Special

Conditions

Residential property sold by the developer (including property covered by s.4B(7)).

Taxable Charge VAT at 13.5%

If acting as taxable person, ask for invoice

13.5% of market value / selling price

N/A 3.1 and 3.2

Partially developed property.

Taxable Give VAT invoice Charge VAT at 13.5%

Ask for invoice 13.5% of market value / selling price

Possible credit if vendor has partial VAT recovery.

3.1,3.2 and 3.9

New or nearly new freehold / freehold equivalent commercial property (including property covered by s.4B(3))

Taxable Give VAT invoice Charge VAT at 13.5%

Ask for:(a) invoice;(b) Date of development; and (c) Evidence of dates and periods of occupation if relevant.

13.5% of market value / selling price


3.1,3.2 and 3.9

Assignment or surrender during adjustment period by an accountable person of occupational lease created by a taxable person prior to 1/7/08 of commercial property (a legacy lease).

Taxable Give:(a) Statement under section 4C(8)(a);And (b) Copy of capital goods record

Ask for:(a) Document under Section 4C(8)(a); and (b) Copy of capital goods record;And self account for VAT

Apply the formula

T X N YPremium / reverse premium ignored.


3.1, 3.4 and 3.9 or 3.1 and 3.2 and 3.9

Table 2: Exempt Sale during Adjustment Period of Second-hand Freehold / Freehold Equivalent Interest where, unless Option

Exercised, deductibility Adjustment may Apply

Property Sold Tax Status Vendor Must Purchaser Must

VAT Calculated By Reference To


Vendor


Conditions

Developed second-hand commercial property sold during adjustment period (both vendor and purchaser are taxable persons).

Exempt, and if joint option to tax not exercised, deductibility adjustment may apply.

Consider:(a) Obliging purchaser to exercise joint option to tax, and (if appropriate) claiming VAT rebate (if any); or (b) Accounting to the revenue for deductibility adjustment.

If joint option exercise, apply reverse charge VAT at 13.5%

If joint option exercised: 13.5% of market value / selling price.

If joint option not exercised: Apply the deductibility adjustment formula;

B X N T

Debit if option to tax not exercised. Possible credit if vendor has partial VAT recovery and option is exercised.

3.1, 3.3 (first alternative) and 3.9 if joint option is exercised.

3.1 and 3.3 (second alternative) if joint option is not exercised.

Table 3: Sale of Transitional Freehold / Freehold Equivalent Interest of

Legacy Lease by a Taxable Person with no Entitlement to Deduct VAT

Property Sold Tax Status Vendor Must Purchaser Must VAT Calculated By Reference To


Vendor


Conditions

Commercial property acquired or developed prior to 1/7/08 and sold during adjustment period.

Exempt with joint option to tax (with no deductibility adjustment).

Consider:(a) Obliging purchaser to exercise joint option to tax to secure partial refund of VAT under Section 12 E(7)(a);or (b) treat supply as exempt.

If joint option exercised apply reverse charge VAT at 13.5%

If option exercised, 13.5% of market value / selling price.

Possible credit if option exercised.

If VAT is charged, 3.1, 3.2, 3.3 (first alternative) and 3.9 or if no VAT is charged delete VAT clause entirely.

Assignment during adjustment period of occupational lease created by a taxable person prior to 1/7/08 of commercial property (a legacy lease).

Exempt with joint option to tax (with no deductibility adjustment).

Consider:(a) Obliging purchaser to exercise joint option to tax to secure partial refund of VAT under Section 12 E(7)(a);or (b) treat supply as exempt.If joint option exercised.

(a) Ask for VAT statement;(b) Ask for copy of capital goods record; and (c) Apply reverse charge according to formula.

T X N Y

Apply formula in Table 1D.

Premium / reverse premium ignored for assignment or surrender of a legacy lease.

Possible credit if option exercised.

3.1, 3.3 (first or second alternative) and 3.9

Table 4: Exempt Sale of Freehold / Freehold Equivalent Property where no deductibility

Adjustment AppliesProperty

Sold Tax Status Vendor Must Purchaser

MustVAT

Calculated By Reference

To

deductibility Adjustment For Vendor


Conditions

Freehold / freehold

equivalent property

which was never

developed or is out of the adjustment

period.

Exempt with option to tax.

Confirm tax status of

property to purchaser

Ask for tax status to be confirmed by documentary

evidence.

N/A unless option to tax is

exercised, then 13.5%

N/A None necessary if joint option is not exercised.

If joint option to tax is

exercised as Table 1, item

D

Second-hand residential

property (not developed

since acquisition) in

private residential use

by owner.

Not taxable. N/A N/A N/A N/A None necessary.

Table 5: Assignment or Surrender for Premium / Reverse Premium of Occupational Lease (other than Legacy Lease) by Taxable Person:

VAT is chargeable at 21% on Premium / Reverse Premium

Property Sold Tax Status Vendor Must Purchaser Must VAT calculated By Reference To

Relevant VAT Special Conditions

Assignment or surrender for

premium/reverse premium by taxable

person of occupational lease

created after 30/6/08 not covered in Table

6 item B.

Premium / reverse premium taxable as

service.

If payer, ask for invoice.

If payee, provide invoice and charge

VAT at 21%



VAT at 21%

21% of premium / reverse premium

3.1, 3.5 or 3.6 and 3.9

Assignment or surrender by taxable

person for premium/reverse

premium of occupational lease created prior to 1st

July, 2008 for a term or less than 10 years where the Landlord’s waiver of exemption

from applies.

Premium / reverse premium taxable as

service.



VAT at 21%



VAT at 21%

21% of premium / reverse premium

Not covered.Use 3.1, 3.5 adapted

and 3.9

Table 6: Assignment / Surrenders of Lease where no VAT is Chargeable as either a Supply of a Good

or a ServiceProperty Sold Tax Status Vendor

MustPurchaser

MustVAT

Calculated By

Reference To

deductibility Adjustment For Vendor

Relevant VAT

Special Conditions

Assignment or surrender by taxable person for

premium/reverse premium of:(a) Occupational lease for a

term of 10 years or more created prior to 1/7/08, where VAT was not chargeable on

supply of Lease(b) Occupational lease for a term of less than 10 years

created prior to 1/7/08 where Landlord did not waive

exemption from VAT on rent.

Exempt (by Revenue

concession).

N/A N/A N/A N/A None necessary

Surrender for premium / reverse premium of

occupational lease created after 30/6/08 where landlord

has not exercised the landlord’s option to tax.

None None None None None None

Table 7: Transfer of Business under Section 3(5)(b)(iii) and Section 5(8)

Property Sold

Tax Status Vendor Must

Purchaser Must

VAT Calculated By Reference

To


Vendor


Conditions

Partially developed freehold / freehold

equivalent commercial

property.

Not taxable because

not a supply for

VAT purposes.

Claim for deductibility adjustment

(if any)

Account for any

deductibility adjustment

on acquisition

For purchaser’s CGS: VAT that

would have been charged had the transaction been a supply for VAT

purposes


3.1, 3.8 and 3.9

New or nearly new freehold /

freehold equivalent interest.

Not taxable because

not a supply for

VAT purposes

Claim for deductibility adjustment

(if any).

(a) Set up capital goods

records based on 20

intervals.(b) Account

for any deductibility adjustment

on acquisition.

For purchaser’s CGS: VAT that

would have been charged had the transaction been a supply for VAT

purposes.


3.1, 3.8 and 3.9

Property Sold

Tax Status Vendor Must Purchaser Must

VAT Calculated

By Reference To

Deductibility Adjustment For Vendor


Conditions

Second-hand freehold / freehold

equivalent

Not taxable because not a supply for VAT

purposes.

Give copy of capital goods

record.

(a) Maintain capital goods

record based on continuation of

business. (b) Account for

any deductibility adjustment at

end of vendor’s current interval.

For purchaser’s CGS: vendor’s VAT position.

N/A 3.1, 3.8 and 3.9

Assignment / surrender of legacy lease


purposes.

Give capital goods record.

(a) Maintain capital goods

record based on continuation of

business. (b) Account for

any deductibility adjustment at

end of vendor’s current interval.

For purchaser’s CGS: vendor’s VAT position.

N/A 3.1, 3.8 and 3.9

Assignment / surrender of occupational lease (other than legacy lease) for premium /

reverse premium.


purposes – The Revenue

accept as intangible asset for

Section 5(8)

N/A N/A Premium / reverse premium

N/A 3.1, 3.8 and 3.9 and insert new special condition as appropriate.

Summary in Diagram Form

Are you selling an old property?

Completed>5 years prior to sale, and not developed in those 5 years

Preliminary tasks

1. Is it a sale for VAT purposes?2. Do the new rules apply?

Are you selling undeveloped land?

Land that has had no work done to it and is not caught by anti-avoidance

The sale is exempt from

VAT


VAT

Are you selling an old building?

Completed>5 years prior to sale, and no significant development in those 5 years.


VAT

Are you selling a used second-hand property?

Completed / not developed since completion / occupied for 24 months / previous VATable transfer since completion

between unconnected VATable persons


VAT

Are you selling a used second-hand building?

Completed within 5 years / occupied for 24 months / previous VATable transfer since completion

between unconnected VATable persons / no significant development

since completion


VAT

The sale is VATable

Compare and Contrast the Five Exempt Categories

Notes

1. The distinction between a “property” and a “building” in this context is that a “property”, as well as including buildings, covers other property works, such as bridges, roads, golf-courses, dams and so on. A “building” means just that: “a building”.

2. If you contrast the meanings of “old properties” and ”old buildings” (categories 3 and 4), you will note that, in order for it to be an old property, no development work must have taken place in the five years prior to sale. In contrast, in the case of “an old building”, no significant development work must have taken place.

3. “Old” in the context of “old properties” and “old buildings” means more than five years: to paraphrase Mr. Wordsworth, five years must have passed; five summers, with the length of five long winters!

4. You will note that in all categories, except category 1, completion must have taken place.

introduction to the new vat on property system ronan o’grady bbls (european), aiti)

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