Michael O’Connor, Tax Partner, William Fry

The Irish VAT on Property Changes, which will be introduced from 1 July 2008, are to regulate VAT on the leasing of property, to provide a Capital Goods System for property, and to make the Irish Vat on Property similar to other EU Member States. The changes will impact on new and refurbished commercial developments, commercial lettings and properties where a change of use is applied for.

"This is the most revolutionary change in VAT on property since VAT was introduced in 1972. It will provide many tax planning opportunities and tax traps for corporate Ireland”, stated Michael O’Connor, Tax Partner at Dublin law firm William Fry, speaking at a breakfast briefing this morning on the changes facing property investors and developers under the new VAT on Property regime.

The transition period requires awareness

Sonya Manzor, Tax Partner, told attendees from the construction, property investment and financial sectors that whilst the changes proposed may seem daunting, the new system would lead to a regularised system of VAT on property and one which is more in-line with the rest of the EU.

“We are now facing a transition period where investors, developers and landlords must be compliant with new systems and legislation. This can be a tricky period and we are advising clients who are considering purchasing property to consider whether or not VAT applies to the property now and whether or not this will change after 30th June 2008. In some cases, businesses who are partially exempt from VAT may be better delaying sales or purchases until after the new legislation has taken affect so they can reclaim previously non-deductible VAT.”

Deirdre Finn, a Tax Assistant at William Frynoted that, “The introduction of the Capital Goods Scheme, which is a totally new concept in Irish VAT law, brings us in line with other EU member states. It’s a mechanism for the adjustment of VAT reclaimed on the acquisition or development of a property in proportion to taxable or non-taxable usage over a certain period. This adjustment can give rise to a VAT repayment or a VAT clawback depending on the circumstances.”

Impact on Leaseholders & Landlords

Landlords and leaseholders are facing a number of changes as a result of the abolition of the current capitalised value system for taxing leases. Under the new VAT regime, Revenue have removed the distinction between long and short term leases for VAT purposes, resulting in all leases, irrespective of their term, being VAT exempt. The landlord does however, have an option to tax the rents at 21%. Landlords will need to opt to tax the rents if they wish to avoid a claw back of VAT on a newly developed building.

Karen Sheil, a Property Partner at William Fry, identified a number of benefits arising from the new system. “Under the new regime, the concept of calculating the capitalised value of the lease and charging VAT on this amount has been abolished. Leaseholders will also welcome the abolition of the Economic Value Test which should simplify assignments and surrenders of leases.”

Sale of Freeholds

The VAT treatment on the sale of freeholds or freehold equivalent from 1 July 2008 will depend on whether the property is regarded as “new / nearly new” or “unnew” and exempt with an option to tax.

Sonya Manzor,stated that, “In deciding whether a property is new or nearly new any work carried out to the property needs to be considered together with when the property was completed and the periods of occupation. When the property is “completed” and “occupied” are new concepts which are important and will determine the VAT treatment on the sale. Whether the property is new or nearly new depends on the time when the sale occurs by reference to when the property was completed and the length of time that it was occupied.”

Changes for Construction Sector

Guests from the construction sector were advised that they faced a shift in VAT responsibility from an employer to contractor for construction and refurbishment work on a property. “A new system of reverse charge VAT means that the person and company employing a contractor will now be responsible for VAT compliance, rather than the contractor engaged to do this work. Contractors need to be aware of this before starting any work. This shift could raise issues for non-registered entities in terms of registration and compliance,” said Olga Vaughan, a Property Associate in William Fry.