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New VAT on property regime Back  
While the Finance Bill has largely confirmed the Budget Day announcement in respect of the introduction of a new VAT on Property regime, the legislation requires very careful consideration as it has the potential to impact a very wide range of current and future property transactions. There are some key points to note for the financial services sector writes Niall Campbell.
Capital Goods Scheme
The introduction of a capital goods scheme will generally be welcomed by VAT exempt / partially exempt entities. While introducing substantial administrative obligations, the scheme will eliminate some of the inequities of the existing VAT system where substantial ‚€útrapped VAT‚€Ě arises on property leases and acquisitions by partially exempt entities.

For example, a bank which acquired a property and recovered only 5% of the VAT charged is currently required to charge VAT in full on any subsequent disposal of property, without any entitlement to reclaim any portion of the irrecoverable VAT incurred initially. The new scheme will eliminate this inequity as the VAT deduction entitlement will be adjusted annually as the property is used and or disposed of.

Property Leases
Post 1 July 2008, financial services companies will no longer face a substantial upfront irrecoverable VAT cost on the taking of a long lease. This is on the basis that the current system of charging VAT at 13.5% on capitalised value of a lease is to be replaced with a system whereby the landlord can choose either to exempt the rent (and not recover any VAT on acquisition or development costs) or charge VAT at 21% on the rent for the duration of the lease.

In circumstances where the tenant‚€ôs VAT recovery rate is low, it is likely to be more advantageous to exempt the rentals and compensate the landlord (e.g. by way of additional rent) for any VAT which he does not recover. This analysis needs to take a number of factors into account, however, so it is important that any financial services entity thinking of taking a lease of new space does the detailed analysis to determine the most advantageous position and engages early with the landlord to agree this as part of the lease negotiations.

Property Sales
The new rules will extend the scope of property sales which will be exempt from VAT. Very broadly speaking, only ‚€únew‚€Ě property will be subject to VAT unless the parties agree to opt to tax the sale. ‚€úNew‚€Ě is effectively the first sale of any property developed or redeveloped within a 5 year period (or 2 years for a second or subsequent sale). These provisions should result in a lower VAT cost than under the current rules for a number of transactions which may be entered into by financial services entities (e.g. sale and leaseback).

Intergroup VAT deferral arrangements
Finally, it should be noted that inter-group VAT deferral arrangements which have been commonly used within the financial services sector for acquisitions / leases of new property will no longer be permitted post 1 July 2008. However, arrangements currently in place will be ‚€úgrandfathered‚€Ě subject to certain conditions. If you have any such arrangement in place, you will need to review it to ensure that these conditions are met, otherwise a full clawback of VAT will arise on 1 July 2008.

While the above sets out some of the issues arising from the new rules for financial services entities, it is clear that it will take some time for the market to fully understand and absorb the impact of these rules. Given the stated objective of Revenue in bringing forward this legislation, namely to provide clarity, certainty and simplification, our initial reaction is that these objectives have not been achieved. Whether they are achieved in the long run or not, the months (maybe years) ahead will present many challenges as all industry participants get to grips with the reality of what the new rules mean in practice.

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