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The Supply of Property - New System

1. Taxable and Exempt Supplies
2. What supplies of property are subject to VAT?
3. What is meant by developed?
4. What is minor development in relation to a property?
5. What does materially altered use mean?
6. When is a property supplied in the course of business?
7. What is meant by a supply of property for VAT purposes?
8. When does a supply of property take place for VAT purposes?
9. When is the supply of a completed property taxable?
10. What is the position where a property is not completed at the time of supply?
11. Are there any further exceptions to the two and five-year rules?
12. When is a property completed?
13. Occupation
14. Exempt supplies
15. Joint option for taxation of exempt supplies
16. Supply in connection with an agreement to develop property
17. What is the taxable amount for the supply of property?
18. Treatment of granting of options to purchase property
19. Treatment of granting of easements and rights of way, etc.

1. Taxable and Exempt Supplies

This section deals with supplies of properties that are completed on or after 1 July 2008 and the supply of properties that are on hand but not completed on that date. Supplies of properties that are on hands on 1 July 2008 but were completed prior to that date are dealt with in Treatment of Transitional Properties and Legacy Leases.

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2. What supplies of property are subject to VAT? (Section 94)

To come within the charge to VAT [1]

• a property must have been developed and
• it must be supplied for consideration in the course of business [2].

The supply of a completed property is taxable only while the property is considered new (see paragraph 9). A property is considered new for a maximum period of five years from the date on which the property itself or a development of the property, other than a minor development, is completed. Where a completed property has been supplied to a person other than a connected person (see Letting of Property New System for what is meant by a connected person), the period for which the property is considered new is limited to a period of two years from occupation following completion of the latest development.

Once a property is no longer new, the supply of that property is exempt from VAT. However, the person supplying such a property and the purchaser may jointly opt to have the supply subject to VAT.

[1] The only exception to this rule is where a property is sold and in connection with that sale there is a contract between the purchaser and another person to develop the property. This is covered more fully in paragraph 16.

[2] See paragraph 6.

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3. What is meant by developed? (Section 2)

Development in relation to land is defined as -

1. the construction, demolition, extension, alteration or reconstruction of any building on the land or
2. the carrying out of any engineering or other operation in, on, over or under the land to adapt it for materially altered use.

Development other than minor development, essentially makes a property 'new' for VAT purposes. For example, where an undeveloped property or an 'old' property is developed the properties are considered 'new' for VAT purposes following the completion of that development.

Land is regarded as developed when -

• A new building is constructed or
• An existing building is extended, altered or reconstructed, or
• An existing building is demolished, or
• Work which adapts the land for materially altered use is carried out (work which is not designed to make a material alteration in the use to which land is put is not development. Thus, no account is taken of fencing, land drainage, laying of roads for agricultural purposes and so on).

Work on maintenance and repairs does not constitute development. The fact that planning permission had been obtained for development does not, of itself, constitute development for VAT purposes.

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4. What is minor development in relation to a property? (94(2)(d))

A supply of a completed property in the course of business is taxable while the building is new. A completed property is regarded as new for a maximum period of five years from completion. If development work is carried out on a property which was completed more than five years before the supply, and that work cannot be considered as minor development work, the property is again regarded as new from the date of completion of that development work.

If a sale takes place within five years of the completion of a development, and the development is considered as minor development, then the sale will be exempt from VAT.

Minor development is a level of development that does not make a building 'new'. It can be described as development on a building that does not (and is not intended to) adapt the building for a materially altered use, provided that the cost of such development does not exceed 25% of the consideration for the supply of the building. In other words, if the property is either materially altered or the cost exceeds 25% of the sale price in the five years prior to sale, then the property will be taxable because the development is not minor.

Where a person adds an additional subsidiary building to the existing building such as an additional floor or an extension, Revenue would not generally consider this to be "development of a previously completed building".

Note: There can be confusion between the the concept of "minor development" and the CGS concept of "refurbishment". It may be helpful to consider that minor development is important only when you are trying to decide if a sale is taxable or exempt and where work has been carried out in the past 5 years on a previously completed building.

"Refurbishment" is a concept within the CGS. Whenever a person carries out a development on a previously completed building, this constitutes a "refurbishment" and the "refurbishment" is a capital good in its own right. There can be several "refurbishments" for any one property; the adjustment period for each "refurbishment" is ten intervals, the first of which begins when that refurbishment is completed. The fact that the development work may or may not have been minor is not relevant to its classification as a "refurbishment".

Examples [3] and [4] below illustrate the test for minor development .

5. What does materially altered use mean? (94)(2)(d))

In determining whether a building has been materially altered it is necessary to look at what the building was capable of being used for before and after the work on the building is carried out. An indicative list of uses is -

• Residential
• Agricultural (e.g. a barn)
• Commercial / professional (eg. Retail, wholesale, use of office space for purpose of business etc)
• Derelict
• Non-business use (e.g. a church etc.)

Whenever a development converts a building from one of the headings above to another it would be considered to have adapted the building for a materially altered use. However, development that converts a former clothes shop to a retail bank would not be considered to have adapted the building for a materially altered use. This is on the basis that a clothes shop and retail bank would come under the heading 'commercial / professional.'

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6. When is a property supplied in the course of business? (Section 2)

The term in the course of business is very wide. Business means any economic activity, whatever the purpose or results of that activity and whether or not the business is subject to VAT. It will generally be obvious whether a supply is made in the course of business. A transaction entered into in a private capacity is not done in the course of business. For instance, a householder who sells her/his private house does not do so in the course of business, even where that person is engaged in business. However, a landlord/investor who sells a property that was used or intended for letting is regarded as making a sale in the course of business.

It should be noted that a person who engages in a single property transaction on a once-off basis may be acting in the course of business. For example, a person who constructs or arranges for the construction of a residence on the site of an existing dwelling for subsequent sale would be regarded as acting in the course of business, even if the site was part of the grounds of that person's private residence.

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7. What is meant by a supply of property for VAT purposes? (Section 19(2))

A supply of goods for VAT purposes is the transfer by agreement of ownership of the goods. In the case of property, a supply includes the transfer in substance of the right to dispose of property, whether as the owner or otherwise.

The term 'in substance' is taken to mean not only the freehold of a property but also other interests in the property that amount to effective ownership. Such interests are referred to in this guide as 'freehold equivalent interests' or just 'freehold equivalent'. For instance, many apartment owners do not hold the freehold of the property. For property law reasons they generally have a very long interest in the property, for instance a 99 or 999 year lease. Such an interest would be regarded as a freehold equivalent.

A transfer of a freehold is a supply of property, as is the creation of a very long lease (a freehold equivalent), say, for a period of 99 years or more, where the consideration is a premium equal to the value of the property with a nominal rent payable annually.

While there may be situations where it is not 100% clear whether or not a supply is a supply of a freehold equivalent, in most cases there should be little or no difficulty. As a general rule, the creation and assignment of standard commercial leases (5, 20, 35 years for example) with rent reviews, etc., are unlikely to be subject to the provision, whereas the creation and assignment of much longer leases (99, 999 years for example) for a large premium with peppercorn rent are in most cases likely to be subject to the provision. Where there is any doubt in relation to a particular case the taxpayer should contact his or her local Revenue Office.

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8. When does a supply of property take place for VAT purposes?

As indicated above, a supply of property for VAT purposes involves the transfer of ownership or the transfer in substance of the right to dispose of the property, whether as owner or otherwise. The transfer of the right to dispose of property as owner is usually regarded as taking place when the contract for sale of the property is completed. It is not necessary that the legal title to the property has been transferred to the purchaser. It is sufficient that the purchaser has acquired, in substance, the right to dispose of the property.

In practice, this generally entails the payment of the full consideration due under the contract. In the more straight-forward situation of a contract for sale, with a deposit being paid and the balance being paid on completion of the contract, the supply will be regarded as taking place on completion of the contract or on payment of the full consideration, whichever is the earlier. If the supply is taxable, any advance payment, part payment or deposit received by the vendor before the supply is completed is taxable in the hands of the vendor on receipt of the payment.

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9. When is the supply of a completed property taxable? (Section 94(2))

A supply of a completed property in the course of business is taxable while the building is new. If development work is carried out to the property, not being minor development work, the property is again regarded as new from the date of completion of that development work.

A completed property is regarded as new for a maximum period of five years from completion. However, once the property has been disposed of to an unconnected person, the period during which the property is regarded as new is restricted to the period covering the first 24 months of occupation of the completed property. It should be noted that if part of a building has been occupied for more than 24 months and part has not, then the consideration for sale is apportioned between the part of the building that is taxable and the part of the building that is exempt.

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10. What is the position where a property is not completed at the time of supply?

The supply of an uncompleted property that is made in the course of business is always taxable. The two and five-year rules only commence to apply once the property has been completed.

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11. Are there any further exceptions to the two and five-year rules? (Section 94(7)(e))

Yes. Where the property is residential property, the supply by the person who developed it in the course of business (i.e. a property developer) or by a person connected with the property developer is always taxable. The two and five-year rules do not apply to supplies of residential property by a property developer/builder.

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12. When is a property completed? (Section 94(1))

'Completion' in the context of VAT on property means that the development of the property has reached the stage where the property can effectively be used for the purposes for which it was designed. The physical state that the property is in when completed - the degree of finishing and fitting that will have been carried out - will depend on its intended use and may vary from one type of building to another. Finishing and fitting work that is normally carried out by the person who will use the property, whether as owner or tenant, does not itself have to be completed for the property to have reached the point of being 'completed'. One essential requirement for completion in all cases is the connection of all of the utility services that will enable the property to be used for the purposes for which it was designed.The five-year rule for taxable supplies of completed property begins from the date of completion.

Note: The two and five-year rules do not apply to sites. For example, if a person carries out engineering work on or over a site this would constitute development for VAT purposes. The sale of this site is subject to VAT for a period of twenty years from when the development work is completed.

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13. Occupation (Section 94(1))

A property is 'occupied' when it is fully in use - use being one for which planning permission for the development of the goods had been granted. It is essential to note that this use is a physical, practical use and not a purely economic or legal occupation. The two-year rule for second and subsequent supplies of a property begins on the date of occupation following completion.

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14. Exempt supplies

Where the supply takes place later than the date provided for under the two and five-year rules, the supply of the property is exempt from VAT. However, where the supply takes place within the VAT-life of the property, there will be CGS implications related to the supply (see CGS - other Adjustments).

15. Joint option for taxation of exempt supplies - (Section 94(5))

In the case of exempt supplies, the parties to the transaction may opt to make the supply taxable. The joint option may be exercised only where the person making the supply and the purchaser are taxable persons i.e. both must be engaged in business in the State. The joint option for taxation cannot therefore be exercised when either or both of the parties are bodies who are engaged in activities which are outside the scope of VAT. The option to tax is a joint option and must be exercised by an agreement in writing between the parties to the transaction.

Where the option to tax has been exercised, the purchaser, and not the seller, will be responsible for accounting to Revenue for the VAT payable, under the reverse charge system. The purchaser should register for VAT, if not already registered.

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16. Supply in connection with an agreement to develop property (Section 94(3))

Supplies of property made in connection with an agreement to develop the property are always taxable, whether or not the person making the supply does so in the course of business. For this provision to apply the purchaser of the property or a person connected with the purchaser must enter into an agreement with a taxable person (usually a developer/builder) to develop the property. The supply of the property and the entering into an agreement to develop the property must be connected in some way. For example, a farmer who sells a site (where the sale of that site would not otherwise be liable to VAT) to a private individual who intends to construct a dwelling on the site would not be making a taxable supply under this provision. But where a landowner and developer jointly arrange for the development of a piece of land, on the basis that the landowner will sell plots to various people who will be required to enter into an agreement with the developer to construct a house on the plot, the sale of the plots and the agreement to develop are considered as connected and the sale of the land is subject to VAT.

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17. What is the taxable amount for the supply of property? Section 37(1) and 38(1)

Where the supply of property is taxable, the taxable amount is the full amount of the consideration payable for the supply. Consideration can be in cash or it can also consist of the value of services to be performed by the purchaser. Generally, the consideration is the amount payable under the contract. In certain circumstances, the market value of the property may be substituted for the amount shown in the contract.

18. Treatment of granting of options to purchase property

Where an option is granted to a person for the right to buy a property after a certain period of time, the VAT treatment depends on the VAT status of the underlying asset. For example, if A grants B an option for €50,000 to purchase his undeveloped field in two years time for an agreed price, the option is exempt from VAT because the sale of undeveloped land is exempt from VAT. Conversely, if the option was granted over a new property, the €50,000 would be subject to VAT at the rate applicable to the sale of the property (the reduced rate.)

Where an option is granted to purchase a property and where the option, if exercised, is exerciseable outside of the 5/2 year period the treatment of the option depends on the wording in the option agreement. If the option agreement specifies that the “joint option for taxation” will be exercised, then the granting of the option is subject to VAT at the reduced rate (on the basis that the sale when it occurs will be subject to VAT). In such cases the supply of the option is not subject to the reverse charge. If, however, the option agreement does not specify that the “joint option for taxation” will be exercised, then the granting of the option is exempt from VAT.

19. Treatment of granting of easements and rights of way, etc.

The granting of an easement or a right of way is considered the supply of a service for VAT purposes. The supply is subject to VAT at the standard rate.

Updated: September 2011

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