| Budget delivers on VAT |
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| The Minister announced the introduction of the new VAT on property regime following an extensive period of consultation. He also made welcome increases to VAT registration thresholds, writes Terry O’Neill. |
VAT on Property regime
The principal VAT change announced relates to an overhaul of the VAT on property regime which will take effect on 1 July 2008. The detailed provisions will be included in the forthcoming Finance Bill. We provided a summary of the original proposals in our February edition of Tax Monitor and reviewed their likely effectiveness in the August edition. These fundamental changes will affect the VAT treatment of all commercial property transactions.
Key Features
• It is proposed that the VAT treatment of the sale of property will no longer be determined by reference to whether the property has been developed since 1972. Instead, VAT will apply to the sales of ‘new’ properties which are defined as the first sales taking place within five years of completion of the property, or any further sale within five years of completion where the building has been occupied for less than two years. Sales of other properties will be VAT exempt but with an option to apply VAT at 13.5%, which will be exercisable jointly by the vendor and purchaser.
• The distinction between ‘short’ and ‘long’ leases will be removed. All leases (except very long leases akin to a freehold) will be exempt from VAT unless the landlord opts to charge VAT on the lease rents at 21%. It would appear the election will be property specific but there will be consequences where cancellation takes place within 20 years from commencement of the lease. Given that leases are commonplace within groups of companies, it is disquieting that it is now proposed that an election will not be possible where the landlord and tenants are connected parties
• A ‘Capital Goods Scheme’ is to be introduced which is a complex mechanism for adjusting the initial VAT deduction arising on a property transaction. Depending on the use to which the property is put over the 20 years from acquisition, a party acquiring or developing a property may be required to adjust the initial deduction claimed. The transitional measures mentioned suggest a partial clawback of VAT deducted in the last 20 years under the old rules where the use of the property changes. It was previously proposed that the Capital Goods Scheme operate over a different adjustment period of 10 years in relation to refurbishment costs which would be cumbersome.
This has not been mentioned in the Budget so it remains to be seen whether a common period will prevail.
Removal of 90% test
The Budget announcement is also important in that plans to introduce the dreaded ‘90% test’ appear to have been shelved.
Under the original proposals, elections to apply VAT on leases could only be made where a tenant has at least 90% VAT recovery. This was an area causing significant concern in the market because of the difficulties monitoring the VAT status of tenants and sub-tenants. The dropping of this measure should avoid VAT being trapped at the level of landlords leasing to exempt or partially exempt financial services tenants.
However much will depend on the specific provisions dealing with cancellation of elections to apply VAT as VAT exempt financial services companies, who currently pay 13.5% VAT upfront on the capitalised value of their rents, may in future pay 21% VAT on rents charged for the full term of the lease which could potentially substantially increase the VAT cost over the life of a lease of say, 20 years or more. Representations have been made to the Department of Finance and Revenue on the potential adverse impact on the financial services industry and it remains to be seen whether these concerns will be taken on board.
Achieving its aims?
As always, we must await the detail in the Finance Bill to better assess whether the new regime will achieve the aims of producing a simple and robust VAT system for property. There have been considerable improvements on original proposals. However, the move to the new regime will inevitably involve new complexities.
Other VAT measures
From 1 May 2008, the VAT registration thresholds will be increased from €35,000 to €37,500 for services and from €70,000 to €75,000 for goods which can only be good news.
Anti-avoidance proposals were announced to introduce a ‘reverse charge’ for VAT supplies made by a subcontractor to a principal contractor in the construction sector from 1 September 2008. These will protect Revenue against any situations of subcontractors charging VAT on invoices and failing to pay these amounts over to Revenue. |
Terry O’Neill is a Tax Partner at KPMG.
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| Article appeared in the December 2007 issue.
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