Introduction
The current rules for VAT on property transactions were introduced in Finance Act 2008 .This guide has been updated in light of the Value-Added Tax Consolidation Act 2010 (VATCA 2010) as the previous legislative references were to the VAT Act 1972. The rules can be broadly summarised as follows.
- Sales of property
- Joint option for taxation
- Letting of property
- Capital Goods Scheme
- Transitional rules - freeholds and leaseholds
- Transitional rules - waiver of exemption
1. Sales of property
The supply of freehold or freehold equivalent interests in 'new' properties in the course of an economic activity is subject to VAT. The five and two year rules determine if a property is 'new' -
- The first supply of a completed property within five years of its completion is subject to VAT.
- The second and subsequent supply of a property within five years of its completion is subject to VAT if it takes place within two years of occupation.
Generally, all sales of 'old' property (those outside the period when considered 'new') are exempt from VAT. The notable exception is the sale of residential properties by a developer/builder where the two and five-year rules do not apply. In such cases, the sale by the developer/builder is always taxable. (Supply of Property - New System)
2. Joint option for taxation
Where the sale of property is exempt from VAT a joint option is provided for whereby the seller and purchaser can opt to tax the sale. Where the option is exercised, the purchaser accounts for the VAT on the sale on a reverse charge basis. (Supply of Property - New System)
3. Letting of property
The letting of property is exempt from VAT. The landlord may opt to tax a letting and that option to tax is letting specific. In other words, the landlord has the right to opt (or not to opt) to tax each letting. However, the option to tax does not apply to:
- a letting of residential property, or
- a letting between connected parties (unless the tenant has at least 90% VAT recovery)
(Letting Property - New System)
4. Capital Goods Scheme
The new rules introduce a Capital Goods Scheme (CGS). The CGS provides for the adjustment of VAT deductibility in respect of the acquisition, development or refurbishment costs over the 'VAT-life' of a property. The CGS does not have any impact in respect of properties that are used for their entire VAT-life for either fully taxable or fully exempt purposes. The purpose of the CGS is to reflect changes in the use to which the property is put over its VAT-life and to ensure fairness and proportionality in the VAT system. The VAT-life of a property is generally twenty years, but in the case of a refurbishment, the VAT-life of a property in so far as it relates to a refurbishment is ten years. (Capital Goods Scheme)
The CGS also has rules to deal with the sale of a property during its VAT-life. It is important to note that if a joint option to tax is not exercised and the person selling the property was entitled to deduct VAT on the acquisition or development costs then there is a claw-back of the residual VAT when an exempt sale occurs. Similarly, if a sale is taxable (either during the 'new period' or because of an option to tax) and the seller was not entitled to deduct all of the acquisition and development VAT, a VAT credit is given for the residual VAT. (CGS - Other Adjustments)
The exercising or terminating of a landlord's option to tax a letting also has CGS implications. Where the option is exercised on a letting in a property that has previously been subject to an exempt letting, an adjustment is made whereby the landlord is given a VAT credit for the residual VAT. Where an option is terminated a claw-back of the residual VAT occurs. Both of these adjustments arise at the time the option is exercised or terminated. A positive CGS adjustment does not apply where a landlord exercises the landlord’s option to tax after 1 July 2008 in respect of a transitional property. This is because transitional properties are not subject to the CGS provisions relating to the landlord’s option to tax. (CGS - Other Adjustments)
The CGS applies to all new properties (acquired or developed) on or after 1 July 2008 or properties refurbished on or after 1 July 2008. For all such properties, a 'capital good record' must be set up and maintained. This record contains all of the information relating to the scheme including how much VAT was deducted on the acquisition or development and details of any adjustments under the scheme, etc. (Capital Goods Scheme)
5. Transitional rules - freeholds and leaseholds
Transitional rules apply to the supply of freehold properties which were taxable under the old rules in Section 4 of the VAT Act 1972 (as amended) and which are supplied on or after 1 July 2008. The rules for such properties mirror the new rules above i.e. the two and five-year rules apply.
The rules also apply to leasehold interests, which were taxable on the capitalised value as a supply of goods under the old rules and which are assigned or surrendered on or after 1 July 2008. Where an assignment or surrender of such a leasehold interest occurs on or after 1 July 2008, it is subject to VAT on the reverse charge basis. The taxable amount is calculated by reference to the number of years remaining in the CGS life of the property.
The CGS rules for dealing with changes in the use of a property during the VAT-life of the property do not generally apply to freehold or leasehold properties that are subject to the transitional arrangements. This means that no adjustment is required if the taxable use of a transitional property (or a transitional leasehold interest in property) changes from one year to the next, unless there is a significant change of use [1]. However, where the sale of a transitional freehold occurs or the assignment or surrender of a transitional leasehold interest occurs, the CGS rules as outlined above apply. (Claw-back of VAT if supply exempt, VAT credit if taxable and no right to VAT deductibility arose on its acquisition) (Treatment of Transitional Properties and Legacy Leases)
[1] An exception to this rule is if an exempt letting of a transitional property occurs on or after 1 July 2008 (Section 95(4)(a)).
6. Transitional rules - waiver of exemption
There are also rules to deal with transitional properties that were let prior to 1 July 2008 where the landlord has a waiver of exemption in place. The majority of these lettings may continue to be taxed under the old rules on or after 1 July 2008 and the waiver of exemption may also be cancelled under the claw-back rules. There are special cancellation rules that apply in respect of waivers of exemption in the case of lettings between connected parties where the waivers were in place on or before 18 February 2008 and are still in place on 1 July 2008. (Waiver Exemption Transitional Measures).
Updated: September 2011