New VAT on Property Rules

Date of Change : 1st July 2008

Sales of New Properties:-

• First sales of new residential properties taxable at 13.5% by the builder/developer who must suffer the VAT;
• All subsequent sales exempt from VAT;
• New non residential properties (properties less than 5 years old) taxable at 13.5%;
• Where a property is occupied for more then 2 years and is sold for a second time within the 5 years of completion this is classed as second hand property and different rules will apply;
• All 99 year leases are regarded as freehold properties and taxable at 13.5%.

Sale of Second Hand Properties:-

• Sales of non residential second hand properties exempt from VAT with an option to tax;
• For a second hand property to be taxable both the seller and the purchaser must opt jointly to tax;
• Where development work is carried out on a property and materially alters it use and the value of the work exceeds 25% of market value the property is then classed as new and if so within 5 years of the development work it will be taxable at 13.5%.

Leases

All leases are exempt from VAT subject to the above.

• No distinction between short and long leases;
• NB There is no longer a waiver of short term lettings;
• NB It is advisable to discuss with the clients whether any existing waiver of exemption should be continued post June 2008;
• Leases of non residential property to unconnected parties - Landlord may opt to tax and charge VAT at 21% on each rent provided the parties are not connected;
• If the parties are connected the Lessee has to have a 90% input credit deduction.
• All leases of residential property exempt from VAT;
• The 4A/4B procedure is discontinued as at 1st July 2008

NB Capital Goods Scheme

A Capital Goods Scheme was introduced in the new VAT Rules. Each property will have a VAT life of 10 or 20 years, 10 years in the case of refurbishment, 20 years in the case of new development.

• Any VAT claimed on the development of a building will be apportioned over the VAT life of the property. Where the use of a property changes from one year to another and the Revenue claw back a portion of the input credits the claw back will be apportioned over the VAT life of the property;
• Where the use of a property drastically changes more then 50% of the input creditors claimed must be repaid to the Revenue, the payment must be made in one go. This is referred to by the Revenue as “the big swing”.

The foregoing is a short summary of some of the changes. It is important that we address any changes with the client and highlight them to the client. This is a complex area and must be treated with care.

O’Gradys Solicitors
10th July 2008