Major changes to the Irish VAT on Property regime will take effect from tomorrow, Tuesday 1st July, changing the treatment of VAT for residential and commercial property owners, investors and landlords. Persons buying or investing in property must make sure they or their professional advisors are fully aware of how the regime impacts on a transaction, or they could incur unexpected payments at a later stage.

Commenting on the changes, Michael O’Connor, Tax Partner at William Fry says, “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 Irish investors”.

Sonya Manzor, Tax Partner, said that whilst the changes proposed may seem daunting, the new system will lead to a regularised system of VAT on property and one which is more in-line with the rest of the EU.

Capital Goods Scheme Introduced

The biggest change under the new regime is the introduction of a Capital Goods Scheme, a totally new concept in Irish VAT law which brings Ireland in line with other EU member states. According to Deirdre Finn, Tax Assistant at William Fry, “This is 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 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.”