Capital Goods Scheme - Interaction with Transfer of Business Relief
- Background
- CGS and transfer of a business
- Transfer of property during the period when property considered 'new'
- Transfer of property during the period when property outside 'new' period
- Interaction with Section 56 VATCA 2010 (Old Section 13A)
- Transfer of business relief where a legacy lease is transferred with the business.
1. Background
Where a transfer of ownership of goods takes place in the course of the transfer of a business or part of a business that transfer is deemed not to be a supply for VAT purposes. This means that no VAT is chargeable on such a transfer.
2. CGS and transfer of a business
As no VAT is chargeable on the transfer of a property in the course of a transfer of a business, there are special rules within the CGS to deal with such transactions. There are two main rules dealing with the transferee to enable him or her to operate the scheme. One applies where the transfer occurs during the period when the sale of the property would have been taxable but for the transfer of business relief (i.e. while the property was considered 'new'.[1] The second rule applies when the transfer of the property occurs outside this period i.e. when if it were supplied other than as part of a transfer of a business, the sale would have been exempt. There are also rules dealing with the transferor.
[1] See Supply of Property
3. Transfer of property during the period when property considered 'new' (Section 64)
Where a transfer of a property occurs in the course of a transfer of a business no VAT is charged on the sale of the property to the transferee. If this occurs during the period when a property is considered 'new' (i.e. if the property was supplied at the time the transfer takes place it would be inherently taxable) then for CGS purposes:
- the transferor is treated as if he/she has made a taxable supply of the property; and
- the transferee is treated as if he/she has been charged the VAT that would have been charged but for the fact that relief for the transfer of business applied. The amount of tax that would have been charged is treated as the 'total tax incurred'. The transferee must pay to Revenue the difference between this amount and the amount that would have been deductible if this amount of VAT had been charged on the supply of the property.
Example 1 below illustrates how this operates in practice.
Example 1 - Transfer of business while property is 'new'- taxable transferor/transferee (Section 64(10)(b))
B Ltd constructs a property that is completed on 6 Oct 2009 for a cost of €1,000,000 + VAT €135,000 (total tax incurred). It deducts all of the VAT on the basis it intends to run a fully taxable bookshop business. B Ltd operates a fully taxable business for three years so there are no adjustments required under the CGS scheme. During their 3rd year of occupation of the property, C Ltd makes B Ltd an offer to buy their business for €2,000,000. Of this, the property is valued at €1,500,000, the stock at €100,000 and the goodwill at €400,000. As this is a transfer of a business no VAT applies. The business is sold to C Ltd on 14/11/2012.
CGS Implications for B Ltd (transferor) -
B Ltd is treated as having made a taxable supply of the property. There are no CGS implications on the transfer as B Ltd has already deducted all of the VAT and used the property for fully taxable purposes. The CGS rules for properties acquired through the transfer of business rules mirror those for taxable supplies from the perspective of the transferor.
CGS Implications for C Ltd (transferee) -
C Ltd is treated as having incurred VAT on the acquisition of the property. As C Ltd is using the property for fully taxable purposes there is no difference between the amount of VAT deemed to have been charged and the amount of that VAT that would have been deductible.
Using the formula to calculate the amount payable:
F - G
(F = amount of VAT that would have been chargeable if the transfer of business relief had not applied,
G = amount of that VAT that would have been deductible but for the application of the transfer of business relief)
€202,500 - €202,500 = 0 (i.e. amount payable by C Ltd is nil)
A new CGS adjustment period begins for C Ltd
'total tax incurred' = €202,500 (Amount that would have been chargeable €1,500,000 x 13.5%)
C Ltd is deemed to have fully deducted this amount.
'base tax amount' = €10,125 (€202,500 / 20)
The initial interval begins on 14/11/2012 and ends on 13/11/2013.
At the end of the initial interval the 'initial interval proportion of deductible use' = 100% so no adjustment required.
'total reviewed deductible amount' = €202,500
'reference deduction amount' = €10,125
C Ltd must then operate the CGS scheme for the property for the remaining 19 intervals in the normal way and account for any change of use or any possible adjustments required when the property is sold, etc.
Example 2 - Transfer while property 'new' - exempt transferor/transferee (Section 64(6)(a))
Training Ltd (TL) purchases a new property on 7 Nov 2010 for €4m + VAT €540,000 ('total tax incurred'). TL are engaged in the fully exempt activity of vocational training and do not deduct any of the VAT. At the end of the initial interval (6/11/2011) there is no adjustment as the 'initial interval proportion of deductible use' is 0%.
'total reviewed deductible amount' = 0
'non-deductible amount' = €540,000 (€540,000 - 0)
During 2011 an international consortium (IC) make an offer to buy the business for €6m. The valuation of the property as part of the offer is €4.5m. TL agrees to sell the business to IC on 1/12/2011. As there is a transfer of a business as a going concern, no VAT applies.
CGS implications for TL (transferor) -
The transfer however triggers a CGS adjustment for TL. The adjustment mirrors the credit that would be given if the property were subject to a taxable supply -
(E x N) / T
(E = non-deductible amount, N = number of full intervals remaining +1,
T = total number of intervals in adjustment period)
(€540,000 x 19)/20
= €513,000
This is given as a VAT credit to TL for the taxable period when the transfer occurs (Nov/Dec 2011).
CGS obligations for IC (transferee) -
IC is treated as having been charged VAT that would have been charged on the supply of the property if the transfer of business relief had not applied.
'total tax incurred' = €607,500 (Amount that would have been chargeable if the transfer of business relief had not applied €4,500,000 x 13.5%).
As IC would not have been entitled to deduct all of the VAT that would have been chargeable, there is an adjustment triggered in the taxable period when the transfer occurs (Nov/Dec 2011)
F - G
(F = amount of VAT that would have been chargeable if the transfer of business relief had not applied,
G = amount of that VAT that would have been deductible but for the application of the transfer of business relief)
€607,500 - 0
€607,500 payable as tax due by IC.
IC is deemed to have deducted none of the 'total tax incurred'
The initial interval begins on 1/12/2011 and ends on 30/11/2012. 'Initial interval proportion of deductible use' = 0%.
'total reviewed deductible amount ' = 0
'non-deductible amount' = €607,500.
IC must operate the scheme for the remaining 19 intervals in the normal way and will be entitled to a VAT input credit at the end of any interval during which the property is used for taxable/partly taxable purposes. It will also be entitled to a credit if the property is sold during the adjustment period and the sale is taxable.
It should be noted that the obligations on the exempt transferor and exempt transferee as illustrated in Example 2 applies only to transfers that occur during the period while the property is 'new' .
4. Transfer of property during the period when property outside 'new' period (Section 64(10)(c))
If a transfer occurs outside the period where a property is considered 'new' (i.e. if the property was sold at the time the transfer takes place it would be exempt from VAT) then the transferee essentially 'steps into the shoes' of the transferor. The transferee takes over from the transferor and 'inherits' the adjustment period of the property, i.e. if six intervals have elapsed then there will be fourteen intervals remaining in the adjustment period for the transferee. Example 3 below illustrates how this operates in practice.
Example 3 - Transfer outside period where property is 'new'
Mr S is a sole trader who runs a fully taxable business. He purchased his current office space for his business on 13/4/2010 for €3m + VAT €405,000. He has no adjustment at the end of the initial interval as his 'initial proportion of deductible use' = 100%.
'total reviewed deductible amount' = €405,000
Mr S continues to trade for 6 years engaging in fully taxable activities. (No adjustment at end of any intervals to that point). During 2016 (7th interval) Mr S begins to plan his retirement. A big firm (BF) becomes aware of this and makes Mr S an offer for the business of €5m. The property is valued at €4m. Mr S accepts the offer and sells the business on 1/7/2016. As there is a transfer of a business as a going concern, no VAT applies. If the transfer of business relief had not applied, the supply of the property would have been exempt from VAT. Because of this the treatment of the transfer for the purposes of the CGS is different to that as outlined in Examples 1 and 2.
Essentially BF becomes the successor to Mr S and 'steps into the shoes' of Mr S for the purposes of the CGS scheme. Mr S is obliged to provide a copy of the 'capital good record' to BF and BF continues to operate the CGS as if it had owned the property from the date it was acquired by Mr S (13/4/2010).
BF must comply with the scheme for the remaining 14 intervals in the normal way and account for any change of use or any possible adjustments required when the property is sold, etc.
5. Interaction with Section 56 VATCA 2010
Section 56 VATCA 2010 (previously known as Section 13A VAT Act 1972 provides for the zero-rating of most supplies to exporters who qualify for authorisation under that provision. These supplies would include the sale of property to the exporter and construction services and other services and goods used by an exporter for the purpose of developing property. Where, as a result of Section 56, an exporter has had costs relating to the acquisition or redevelopment of a property zero rated - including refurbishment by the exporter as a tenant - then, for the purposes of the CGS, those inputs are treated as if Section 56 had not applied to them and as if the VAT had been charged at the rates appropriate to the goods or services concerned and fully deducted by the exporter. The exporter therefore has the same responsibility within the CGS in respect of capital goods acquired or developed and zero rated under a Section 56 authorisation as he would if the authorisation had not applied. This is provided for by Section 63(1) of the VATCA 2010.
6. Transfer of business relief where a legacy lease is transferred with the business.
Where a person purchases a business and the transfer of business relief applies and where, as part of the business a legacy lease is transferred, the person acquiring the business 'steps into the shoes' of the transferor for the purposes of the CGS. There is no obligation on the transferor to issue a document as would be the case if the legacy lease was assigned and the transfer of business relief had not applied. The transferee simply uses the capital good record for the legacy lease for the purposes of operating the CGS until the end of the adjustment period for the legacy lease.
Updated: September 2011