Letting of Property - New System
- Overview
- Lettings are exempt from VAT
- Option to tax lettings
- How does a landlord opt to tax a new letting?
- Can a landlord opt to tax the letting of a property where previous lettings were exempt?
- Can the landlords option to tax a letting apply in all cases?
- When is a landlord regarded as connected with a tenant or a person who occupies a building owned by the landlord?
- Termination of an option to tax a letting
- What happens if an option to tax is terminated?
- On what amount is tax chargeable when a letting is opted?
- What is the VAT treatment of premiums under the new VAT on Property rules?
- What is the difference between letting and a licence?
1. Overview
Letting of property is exempt from VAT but the landlord may, with some exceptions, exercise an option to apply VAT to a letting. No distinction is made between leases for a period of ten years or more and short-term lettings, as was the case before 1 July 2008. However, certain very long leases are treated as a supply of the property: These are referred to as freehold equivalent leases and are dealt with in The Supply of Property, paragraph 7.
Letting in the context of the new VAT on Property rules includes leasing and letting.
2. Lettings are exempt from VAT
Lettings are exempt supplies of services for VAT purposes. A landlord who makes an exempt letting is not entitled to deduct VAT incurred on the acquisition or development of a property, which is subject to the letting.
A landlord may opt to tax a letting. However there are restrictions as to the circumstances where a landlord may avail of the option (see paragraphs 6 and 7 below).
3. Option to tax lettings (Section 97(1))
Where a landlord opts to tax a letting, that service becomes subject to VAT at the standard rate. The landlord is entitled to deduct VAT incurred on the acquisition or development of a property that is to be used for the purposes of making taxable lettings.
The option to tax applies to an individual letting of a property. Under the old waiver of exemption rules, a waiver applied to all short-term lettings (period less than 10 years) of the
landlord. That is not the case with the option to tax. Indeed, it may well be that a landlord may opt to tax a letting of part of a building while making an exempt letting of the rest of the building. When a person becomes registered as a result of opting to tax a letting, it should be noted that whilst the option extends to the opted lettings only, the registration will cover any other taxable activities of the landlord.
4. How does a landlord opt to tax a new letting? (Section 97(1)(b) and (c))
A landlord who claims a deduction for input tax incurred on the acquisition or development of a property, which is to be used for letting, istreated as having exercised the landlord's option to tax the letting of that property. This might best be described as a "development stage" option to tax.
When the property is let, the landlord must either include a written provision for the taxation of the rent in the letting agreement or issue a document to the tenant stating that VAT is chargeable on the letting. Otherwise, the option to tax that the landlord was treated as having exercised by claiming input credit will be regarded as terminated and the landlord will be subject to a Capital Goods Scheme adjustment on termination of the option. (See CGS - Other Adjustments). It is not possible to backdate a landlord's option to tax.
Example 1 - Exercising the landlord's option to tax at development stage and at commencement of the letting
Mr. A develops a building in 2012 which is to be let to commercial tenants. He intends to opt to tax the lettings and registers for VAT on the basis that he will make taxable lettings of the property. He claims a repayment in respect of the VAT charged by the builder, architects, etc. Mr. A is treated as having exercised the landlord's option to tax the letting.
When he comes to let the building, Mr. A either includes a provision in the letting agreement to the effect that the rents will be taxable or issues a document to the tenant stating that the VAT is chargeable on the rents. Mr. A then charges his tenants VAT on the rents and accounts to Revenue for that tax.
Example 2 - Terminating a development-stage landlord's option to tax
As in Example 1, Mr. A intends to exercise the landlord's option to tax the rents from the property. However, when he comes to let the property he neither includes a provision in the letting agreement to the effect that the rents will be taxable nor issues a document to his tenant to that effect. Mr. A must make a CGS adjustment in the VAT period in which the letting is made and repay the tax deducted in relation to the property. (See CGS - Other Adjustments).
5. Can a landlord opt to tax the letting of a property where previous lettings were exempt?
Yes, the landlord can opt to tax such rents by either agreeing in writing with the tenant (either an existing or new tenant) that the rents will be taxable or by issuing a notice in writing to the tenant to this effect. With effect from the date of the agreement/notice, rents from that property will be taxable and the landlord may be entitled to make a CGS adjustment in respect of VAT incurred on the acquisition or development of the property. (See CGS - Other Adjustments). 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 the provisions in the CGS that would give rise to such an adjustment are disapplied for transitional properties. It is not possible to backdate a landlord's option to tax.
Example 3 - Opting to tax a particular letting
Ms. B incurred €250,000 VAT on the acquisition of a property in 2010 and has been letting the property for a number of years. She did not claim input credit for this VAT. In November 2014 the existing tenant leaves and in May 2015 Ms. B succeeds in getting a new tenant. The new letting agreement includes a provision that the rents will be subject to VAT. Ms. B will be required to account for VAT on the rents from the new tenant. She will be entitled to a VAT credit in respect of a CGS adjustment by reference to a proportion of the VAT incurred on the acquisition or development of the property. The input credit in this case will be €250,000 x 16/20 = €200,000. (See CGS - Other Adjustments).
6. Can the landlord's option to tax a letting apply in all cases? (Section 97(2))
No. There are restrictions on the option to tax rents. The option to tax cannot apply in the following circumstances:
- Where the property is occupied for residential purposes. (See Section 97(4))
- Where the letting is between connected persons. But, if the tenant is entitled to deduct at least 90% of the tax chargeable on the rent, this restriction does not apply.
- Where the property is occupied by the landlord or a person who is connected with the landlord. This rule applies whether or not the agreement between an unconnected tenant (who holds the original lease from the landlord) and the person who occupies the property is a letting agreement or any other agreement (e.g. licence), which allows the person to occupy the property. (See Example 4 below). But, if the occupant is entitled to deduct at least 90% of the tax chargeable on the rent, this restriction does not apply.
7. When is a landlord regarded as connected with a tenant or occupant? (Section 97(3)(b))
The term 'connected persons' is defined in the legislation. The full text of the definition is reproduced in Appendix A.
Generally, connectivity can be established as outlined below.
Individuals are connected with:
- their spouses or civil partners,
- their relatives (brothers, sisters, ancestors or lineal descendants) or relatives of their spouses or civil partners,
- individuals, or spouses or civil partners of individuals, with whom they or their spouses or civil partners are in partnership,
- the settlor or beneficiary of a trust where the individual is a trustee of that trust and vice versa.
Companies or other bodies of persons are connected with:
- persons who control that company,
- other companies that act in pursuit of a common purpose with the company, or
- a person or persons with a reasonable commonality of interests who have the power to determine the activities of two companies.
Note: This list is indicative only. Reference should be made to Appendix A for the full definition.
8. Termination of an option to tax a letting (Section 97(1)(d))
In the context of a "development stage" option (see paragraph 4 above) ,the law provides that despite the assumption in relation to the entitlement to input credit at development stage, if the landlord subsequently fails to meet the documetary requirements in relation to the letting (i.e. include a written provision for the taxation of the rent in the letting agreement or issue a document to the tenant stating that VAT is chargeable on the letting) the option to tax that the landlord was treated as having exercised is terminated and the landlord will be subject to a Capital Goods Scheme adjustment on termination of the option.
A landlord can terminate an option to tax rents by either entering an agreement in writing with the tenant that the rents will no longer be taxable or by issuing a notice in writing to the tenant that the rents will no longer be taxable. The termination date will be no earlier than the agreement date or the date of receipt of the notification by the tenant.
An option to tax rents will be terminated automatically if:
- the landlord becomes connected with the tenant ,
- the property becomes occupied by a person connected with the landlord, or
- the property is used or to be used for residential purposes ( Section 97(1)(d)(v) and 97(5)).
Note; if the occupant is connected but entitled to deduct at least 90% of the tax chargeable on the rent, this restriction on the option to tax does not apply.
9. What happens if an option to tax is terminated?
Where the option is terminated during the adjustment period relating to the property (see CGS - Other Adjustments), a CGS adjustment will be due and the landlord must account to Revenue for the tax due as a result.
Example 4
In Example 1, A's tenant is an unconnected person but that person sublets the property to C, who is in partnership with A in another venture and has a 50% VAT recovery rate. Since the property is now occupied by a person connected with A who is not entitled to deduct at least 90% of the tax chargeable on the rent, the option to tax is automatically terminated. (See diagram below) A is obliged to make a CGS adjustment as the option has been terminated during the adjustment period (see CGS - Other Adjustments)
10. On what amount is tax chargeable when a letting is opted?
While the landlord's option may sometimes be described as 'opting to tax the rent' from a particular property, the landlord is in fact opting to make the service of letting the property chargeable to VAT. All of the consideration attributable to that service while the option is in effect therefore becomes subject to VAT. Payments or other consideration received by the landlord prior to effecting the option or after terminating it - for example, a premium or balloon rent payment - are taxable as a result of the option to the extent that they relate to the service of letting supplied while the option is in effect.
A 'rent holiday' - a rent-free period that is allowed for bona fide commercial reasons will not require special VAT treatment.
The ordinary rules apply in determining when the VAT on the rents becomes due. VAT on the rents should be included in the VAT return for the period in which the rents become due, unless the landlord has been authorised to use the cash receipts basis. Where rents are paid in advance, the VAT becomes due for the VAT period in which the payment is received.
11. What is the VAT treatment of premiums under the new VAT on Property rules?
A premium is a sum payable in connection with the granting of a lease, the surrender of a lease or the assignment of a lease.
Where the interest in the property that is being granted or assigned is a freehold equivalent interest (see The Supply of Property - paragraph 7), the premium is treated as part of the consideration for the supply of the property. The VAT treatment of such a premium will follow the general rules for VAT on supplies of property, as outlined in Supply of Property.
Where the interest in the property is not a freehold equivalent or a legacy lease (see Transitional Properties - paragraph 7), the VAT treatment of the premium is outlined in the following table:
| Nature of Payment | VAT Treatment |
|---|---|
| Premium payable by tenant to landlord as consideration for landlord agreeing to grant the lease | The VAT treatment of the payment will depend on whether the landlord has opted to tax the letting in question. Where the landlord has opted to tax the letting, the premium is taxable; where the landlord has not opted to tax the letting, the premium is exempt. |
| Premium payable by tenant to landlord as consideration for the landlord agreeing to the surrender of the tenant's lease | The VAT treatment of the payment depends on whether the landlord has opted to tax the letting in question. Where the landlord has opted to tax the letting, the premium is taxable; where the landlord has not opted to tax the letting, the premium is exempt [1]. |
| Premium payable by a landlord to induce a tenant to enter into a lease; this may be in the form of a payment to assist tenant with cost of fit out | In merely agreeing to take a lease, a tenant is not providing a service to the landlord. If no other service is involved the payment is therefore not made in respect of the provision of a service by the tenant and no VAT arises. However, if by taking the lease the tenant is providing a service, that service is taxable. An example of such a service would be a well-known brand proprietor, which provides an advertising service by agreeing to be a tenant in a new shopping complex. In this case the premium is subject to VAT. |
| Premium payable by a tenant (the assignor) to another person (other than the landlord) as consideration for that person agreeing to accept an assignment of the lease. The person to whom the payment is made is usually referred to as the assignee. | In agreeing to take over the tenant's rights and obligations, the assignee is providing a taxable service to the assignor. The service is subject to VAT at the standard rate [1]. |
| Premium payable to a tenant (the assignor) as consideration for assigning the lease to another person (the assignee) | In assigning his interest in the lease the assignor supplies a service for consideration that is subject to VAT at the standard rate [1]. |
[1] Independently of the tax status of the premium, a CGS adjustment may arise where the assignment or surrender occurs during the adjustment period for refurbishments carried out by the assignor. In certain circumstances, the CGS adjustment may be avoided by the assignee agreeing to be responsible for the CGS in relation to the refurbishments. (See CGS - Other Adjustments paragraphs 7 and 8)
12. What is the difference between letting and a licence?
It is important to note that while these concepts exist in land law, the difference between a lease and licence for VAT purposes must be determined in accordance with the EU VAT Directive 2006 and the European Court of Justice case-law. While each agreement will be determined on its own merits as to whether or not it is a lease or a licence, a lease would generally have the following characteristics -
- The tenant has the right to occupy the property and to exclude all others, and
- The tenant will pay a consideration in exchange for this right and the right will usually be for a fixed period of time.
In contrast to the supply of a letting service which is exempt from VAT, the supply of a licence is subject to VAT at the standard rate.
Updated: September 2011