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VAT on Property

The rules governing VAT on property transactions were changed effective from the 1st of July 2008. It is a very complex area of VAT law and professional advice should always be sought prior to entering in any property transactions.

Supplies of Property

VAT must be charged @ 13.5% on the supply of a property that is considered ‘new’. Two rules, the two and five-year rules, determine if a property is “new”.

  • The first supply of a completed property within five years of its completion is considered to be the supply of a new property and is subject to VAT.
  • The second and subsequent supply of a property is considered to be the supply of a new property and subject to VAT but only if it takes place within two years of occupation.

The supply of an “old” property (i.e. one no longer considered “new”) is exempt from VAT. However, the seller and the buyer may jointly elect to charge VAT on the supply. Non election may result claw back of Vat claimed the acquisition/development of the property.

Supply of Residential Property

VAT is always chargeable on the supply of a residential property by a developer/builder – the two and five-year rules do not apply in such cases.

Supply of Property in connection with a contract to develop the property

A supply of property in connection with a contract to develop the property is subject to VAT.

Letting of Property

The letting of property (short or long term) is exempt from VAT. However, a landlord may elect to charge VAT on rents resulting in an entitlement to deduct VAT incurred on the acquisition or development of the property or on the portion of the property to which the election relates.

The option to tax applies to a specific letting. However, the option to tax does not apply to:

  • A letting of residential property, or
  • A letting between connected parties, where the tenant cannot recover 90% of the VAT.

A landlord can exercise an option to tax a letting or terminate an existing option to tax a letting at any time. Doing either has implications under the Capital Goods Scheme.

Capital Goods Scheme

The Capital Goods Scheme (CGS) is a mechanism for regulating deductibility over the “VAT-life” of a capital good. For VAT purposes a capital good is developed property. The scheme operates by ensuring that the deductibility for a property reflects the use to which the property is put over the VAT-life of the property.

The VAT-life of a property is generally 20 years but the VAT-life of a refurbishment is 10 years. The VAT deducted initially is adjusted annually over the VAT-life of the property if there is a change of the use of the property.

The CGS does not have any impact in respect of properties that are used for the entire “VAT-life” for either fully taxable or fully exempt purposes.

It is important to note that the supply of an “old” property during its “VAT-life” without charging VAT will mean a claw-back of some of the VAT deducted in respect of the acquisition or development costs of the property.

The exercising or terminating of a landlords option to tax during the “VAT-life” of a property has CGS implications.

CGS Record

The CGS applies to all new properties (developed) on or after 1 July 2008 or properties refurbished on or after 1 July 2008. For all such properties, a “capital good record” must be set up and maintained. This record should contain all of the information relating to the scheme including how much VAT was deducted on the acquisition or development and details of any adjustments under the scheme, etc.

Transitional Rules

The new rules apply to freehold properties held on 1 July 2008 for disposals after that date.

Special rules apply to properties held at 1 July 2008 under a long lease (of ten years or more) created before that date.

There are also rules to deal with transitional properties that were rented prior to 1 July 2008 where the landlord has a waiver of exemption in place. The existing waiver of exemption may continue in place for the majority of these properties on or after 1 July 2008. The waiver of exemption may also be cancelled under the old rules. There are special cancellation rules that apply in respect of waivers of exemption in the case of lettings between connected parties.