VAT and Property Sales
Property transactions are a unique and complex area in VAT law. Property sales can have potentially costly consequences for both purchasers and vendors. The VAT treatment of property sales differs vastly from the supply of other goods and services.
Firstly there are two sets of rules to contend with. VAT on property rules were significantly overhauled in July 2008 with new rules applying to properties acquired or developed after July 2008 and transitional rules applying to properties acquired or developed prior to July 2008.
Secondly, VAT reclaimed on the acquisition or development of a property can be clawed back in a period of up to twenty years where the VAT use of a property changes, for example, a VAT exempt letting of a property, change in your own VAT recovery rate or, indeed, the disposal of a property. Conversely, VAT that was previously irrecoverable can become partially recoverable due to a later change in use of the property for taxable supplies. Yearly adjustments can be required where the VAT use fluctuates year on year.
Thirdly, in most circumstances there are obligations to retain records, known as capital goods scheme records. These records must record all VAT incurred on acquisition or development of a property for up to 20 years. This obligation applies regardless of whether that VAT is recoverable or not. In some cases there can be more than one record for a single property. This arises where there has been even minor alterations or development to a property. These records are used to track VAT recovered on a property and are linked to the adjustments referred to above.
In certain circumstances vendors are required to hand capital goods scheme records over to the purchaser of their property and it becomes the purchaser’s responsibility to maintain records going forward. The implications of doing this are discussed below.
I’m selling a property, what are the VAT implications?
The first question to ask would be whether or not you are obliged to charge VAT or not on the sale. The general rule is that you are required to charge VAT on the sale of a new completed property and not on the sale of an old property. A completed property is deemed old if no significant development work has been done to it in the 5 years before you sell it or, in some cases, if it has been occupied for two years or more before sale.
Development work can be quite broad in its scope from a VAT perspective so if any work has been carried out to a property, including relatively minor works, this would all need to be considered in the context of a sale of the property.
As always there are exceptions to these rules. In particular sales of older residential properties can still be subject to VAT, in certain circumstances, even when they are more than 5 years old. Furthermore there are some exceptions to this rule for properties which were acquired before July 2008 or properties being sold with the benefit of certain leases granted before July 2008.
If a property is “incomplete” generally this would also be subject to VAT but again there are exceptions to this rule.
However if a sale is exempt from VAT this can result in an irrecoverable VAT cost arising under the capital goods scheme if you have recovered VAT in the previous 20 years. To avoid such a cost you can, in certain circumstances, opt to make an otherwise exempt sale subject to VAT by exercising what is known as the joint option to tax. However as the description suggests this requires the purchaser’s agreement and can be contentious if a purchaser is unwilling to pay VAT on a sale and objects to the option.
Separate to VAT exempt sales, you may also not be required to charge VAT on the sale of a property where the sale is subject to transfer of business relief. This relief effectively results in the supply being treated as falling outside the scope of VAT but the application of this relief, which is compulsory when it applies, results in other VAT implications under the capital goods scheme.
As mentioned transfer of business relief is not an optional relief. Where it applies, it applies and neither party can opt to not apply transfer of business relief. Transfer of business relief applies to sales to accountable persons of assets forming part of a business where those transferred assets constitute an undertaking or part of an undertaking capable of being operated on an independent basis.
Broadly with property this would the case where the property is part of a larger transaction involving the sale of a business or in some cases simply properties which are let at the time of sale or have been actively let before they were sold. Revenue are currently reconsidering the circumstances in which transfer of business relief applies to sales of properties used for letting purposes so watch this space.
As you can appreciate it can sometimes be difficult to determine for certain that transfer of business relief does apply so transactions need to be reviewed on a case by case basis in line with the legislation, Revenue guidance and both CJEU and national case law.
If transfer of business relief does apply to a sale, what does this mean for the VAT in play under the capital goods scheme? You need to consider if a sale would, but for transfer of business relief, have been subject to VAT or VAT exempt. If the sale would be VAT exempt but for transfer of business relief you might be required to pass capital goods scheme records to the purchaser. This has implications for a purchaser as well which are discussed below.
If the sale would, but for transfer of business relief, be subject to VAT then, in most circumstances, capital goods scheme records are not required to be passed over and there is no further capital goods scheme costs for the vendor but there may be further issues for a purchaser.
There are also complex anti-avoidance rules for connected party sales that can be costly for a vendor which also need to be considered where you are selling property to a connected party.
Careful consideration should be given to the VAT clause to be included in a sales contract. The Law Society of Ireland have published a number of VAT clauses that cover several scenarios but, in some cases, a vendor may need to draft their own VAT clause to protect their interests.
A vendor may also be asked to complete a document known as pre-contract VAT enquires. This is another document that is published by the Law Society of Ireland and contains queries to cover a number of different scenarios from a property perspective.
I’m buying a property, what are the VAT implications?
Firstly are you being charged VAT on the sale of a property or not? If you are, you need to be satisfied that VAT is correctly being charged on a sale as Revenue can deny a VAT input credit if VAT was not correctly charged in the first place, for example, if transfer of business relief applies to a sale and VAT is incorrectly charged.
You should also consider whether or not you can recover VAT on the purchase. This would be linked to your intended use of the property. If you intend to use the property for a business with full VAT recovery then generally you would be entitled to recover the VAT, but you would need to monitor your VAT use of the property for the next 20 years. If your VAT recovery entitlement changes year on year then you will have annual payments to Revenue or repayments from Revenue.
Perhaps you intend to let the property. In that case it would be necessary to consider if you will be charging VAT on the rents. This is not always possible from a VAT law perspective or even a commercial perspective.
If the vendor is seeking to make the sale subject to VAT by exercising the joint option to tax you should consider your own VAT recovery for the foreseeable future before agreeing to same. Remember the joint option to tax requires both parties consent.
If VAT is not charged, again, you would need to understand why this is the case. In particular, VAT would not apply on the sale where transfer of business relief applies as discussed above or if the property is old and has not been developed.
If the sale is subject to transfer of business relief, you would need to consider what your obligations under the capital goods scheme are. If the sale would have been subject to VAT but for transfer of business relief and you would not have been entitled to recover all the VAT that would have been charged, then you will have to make a payment to Revenue of the VAT you would not have been entitled to recover. For capital goods scheme records purposes you would need to create a new 20 year capital good scheme record for the property commencing on the date of acquisition. Again subsequent changes in use could result in VAT payments or repayments due.
If a sale is exempt but for transfer of business relief then you might be taking over the existing capital goods records which could result in a VAT cost or possibly VAT refunds if the VAT use of the property changes as a result of or after the purchase.
Particular care should be taken where you are taking over existing capital goods scheme records. The VAT on capital goods scheme records is based on historical VAT recovered. Due to the fall in property values since the 2008 crash, we have seen some cases where the VAT in play under the capital goods scheme can be more than the price being paid for a property. This would be a very nasty surprise indeed if you had to repay more VAT to Revenue than you actually paid for a property in the first place!
Enquiries should be made prior to signing any contract as to the VAT treatment of a sale and any historical VAT that you are now responsible for. This can be done by issuing the Law Societies pre-contract VAT enquires referred to above and sometimes these raise further questions for a purchaser.
You should also be satisfied that the VAT clause you are signing up to in a contract is appropriate for the sale and not contracting you to something that you are not agreeable to, for example, the clause might state that the purchaser and vendor have agreed to exercise the joint option to tax.
The above is a high level overview of the VAT treatment of property sales, but, as touched on above, there are often exceptions to the general rules or indeed exceptions to the exceptions and quite often there can be situations where at first glance the VAT treatment is not black and white.
The Deloitte Indirect Tax Group has market leading VAT experts to guide you through many complex issues involved in property transactions and to ensure you avoid significant potential pitfalls.