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Treatment of Transitional Properties and Legacy Leases

This section deals with the supply of completed properties that are on hand on 1 July 2008 (see Supply of Property, paragraph 9 for a discussion of completion in respect of property). Where a property is on hand at that date but is not completed, the rules described in Supply of Property (the new rules) apply to any supply of that property on or after 1 July 2008. The properties dealt with in this section can be held either under a freehold or freehold equivalent interest (see Supply of Property) or under a long lease that was treated as a supply of goods under the VAT on property rules applying prior to 1 July 2008. In this Guide these properties will be referred to as transitional properties. Where a property is sold in connection with a contract to develop the property, the sale is subject to VAT in any event (see Supply of Property, paragraph 16 ).

Paragraphs 1 to 6 deal with properties held under a freehold or freehold equivalent interest at 1 July 2008.Paragraphs 7 to 14 deal with legacy leases.

1. What is the treatment of transitional properties from 1 July 2008?
2. What is the treatment when the holder was entitled to deduct any of the VAT incurred on the acquisition or development of the property?
3. What is the position where the person making the supply was not entitled to deduct any of the tax incurred on the acquisition or development of the property?
4. What is the position if further development is carried out on the property on or after 1 July 2008?
5. Does the CGS apply to transitional properties?
6. What is the CGS adjustment period for transitional properties?
7. What are legacy leases?
8. How are such leases dealt with under the new VAT on property provisions?
9. What is the position where a tenant was entitled to deduct any of the tax incurred on the acquisition of the lease?
10. What is the position where the tenant was not entitled to deduct any of the tax incurred on the acquisition of the lease?
11. What is the CGS adjustment period for legacy leases for a person who 'owns' a legacy on 1 July 2008?
12. Who is responsible for the VAT chargeable on the assignment or surrender of a legacy lease?
13. What is the tax payable where the assignment or surrender of a legacy lease is taxable?
14. What obligations does the person making the assignment or surrender have for VAT purposes?
15. What is a reversion?
16. What is the tax treatment of the sale of a legacy lease reversion?
17. Sale of a transitional property following the surrender of a legacy lease.
18. What is the VAT treatment of post-letting expenses in relation to legacy leases?
19. Are legacy leases subject to the CGS annual adjustments?
20. What is the VAT treatment of deeds of variations in relation to legacy leases?

1. What is the treatment of transitional properties from 1 July 2008? (Section 95)

The treatment will depend on whether the holder was entitled to deduct any of the VAT incurred on the acquisition or development of the property.

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2. What is the treatment when the holder was entitled to deduct any of the VAT incurred on the acquisition or development of the property?

Where the holder was entitled to deduct any of the tax incurred on the acquisition or development of the property, the VAT treatment of the supply of the property is the same as the treatment that applies to properties completed on or after 1 July 2008 (see Supply of Property). Where the property is considered new (under the two and five-year rules), the supply of the property is taxable. The taxable amount is the full consideration for the supply.

Where the property is supplied when it is no longer considered 'new', the supply is exempt from VAT. However, the seller and the purchaser may jointly opt to tax the supply if they are both taxable persons. Where the option to tax is exercised the purchaser must account for the VAT on the supply on the reverse charge basis (see Supply of Property, paragraph 15 ).

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3. What is the position where the person making the supply was not entitled to deduct any of the tax incurred on the acquisition or development of the property? (Section 95(3))

Where the person making the supply was not entitled to deduct any of the tax incurred on the acquisition or development of the property, the supply of the property on or after 1 July 2008 is exempt from VAT. However, the seller and the purchaser may jointly opt to tax the supply, if they are both engaged in business. Where the option to tax is exercised the purchaser must account for the VAT on the supply on the reverse charge basis (see Supply of Property, paragraph 14 ).

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4. What is the position if further development is carried out on the property on or after 1 July 2008?

Where a development is carried out on a transitional property on or after 1 July 2008, this development 'creates' a capital good for the purposes of the CGS and is referred to as a 'refurbishment' (see Capital Goods Scheme, paragraph 5). If the owner of the property uses the property for the purposes of his or her business their only obligations will be to adjust for any changes of use (from taxable to exempt or vice versa) under the CGS.

Where a development is carried out on a transitional property on or after 1 July 2008 and that development makes the property 'new', i.e. if the development work is not considered a 'minor development' (see Supply of Property, paragraph 4), then the property is not treated as a transitional property. In such cases, VAT is chargeable on the sale. It is important to note that the test of whether or not a property has been made 'new' by virtue of such a development only applies when the property is sold (see paragraph 4 and paragraph 5 of Supply of Property).

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5. Does the CGS apply to transitional properties? (Section 95(11))

In most cases, the CGS only applies in relation to the supply of such properties. The 'normal' annual adjustments under the CGS and the adjustments on exercising and terminating the landlord's option to tax a letting of the property do not apply. However, where the holder makes an exempt letting of such a property a deductibility adjustment under Section 95(4)(a) VATCA 2010 is required.

If, on or after 23 February 2010 a transitional property is used for the first time, or there is a change of use in the property, what is referred to as the "big-swing" test (Section 64 (4)) will apply to such properties. (See Appendix B) Where a transitional property is supplied within the VAT-life of the property, the CGS adjustments relating to supplies apply to that transaction. If such a property is sold and the sale is exempt from VAT, the claw-back provisions of the CGS in relation to exempt supplies apply. If such a property is sold and the sale is taxable, the additional input credit provisions of the CGS in relation to taxable supplies apply. (See CGS - Other Adjustments). Another example of when the CGS does apply to transitional properties is where the property was acquired on or after 1 July 2007 and prior to 1 July 2008. In such cases, unless the purchaser has adjusted the input credit in accordance with Section 61(7), (apportionment of dual-use inputs following the end of the accounting period during which the property was acquired) the ordinary CGS rules for the adjustment of the deductible amount at the end of the initial interval will apply to the VAT incurred in relation to the property (Section 95(13)) .

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6. What is the CGS adjustment period for transitional properties? (Section 95(12)(c))

The CGS adjustment period in relation to a freehold or freehold equivalent interest in a completed property on hands at 1 July 2008 is a period of 20 years from the acquisition of the interest. Where a transitional property has been developed since its completion or acquisition, this development 'creates' a capital good for the purposes of the CGS and is referred to as a "refurbishment" (see Capital Goods Scheme, paragraph 5 ). The CGS adjustment period for this refurbishment is ten intervals. The legislation currently states that if the property has been developed since the acquisition / creation of that interest ,the adjustment period is "20 years from the date of the most recent development of those goods". As outlined above, Revenue accepts that this clause will not apply to transitional freehold interests where the person who owns that freehold interest carries out a development and that development is a "refurbishment" for VAT purposes.

The following examples indicate some different adjustment periods.

[1] See paragraph 11 for CGS obligations in relation to transitional properties and refurbishments that have been completed prior to 1 July 2008

Paragraphs 7 to 14 deal with long leases (leases of ten years or more ) that were created prior to 1 July 2008.

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7. What are legacy leases? (Section 95(1)(b))

Legacy leases are interests in property (so called because they are a legacy from the old system of VAT on property) that were treated as a supply of goods under the old rules. The term does not include interests that constitute freehold equivalent interests (see Supply of Property). The lease must have been held by a taxable person on 1 July 2008 - it must, in other words, form part of the assets of a business at that date.

The creation of a legacy lease - and in most cases its subsequent assignment to another tenant - was chargeable to VAT at the reduced rate as a supply of goods (property). The capitalised value of the rent payable under the lease was added to any other amounts payable, such as a premium, to determine the consideration on which VAT was charged.

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8. How are such leases dealt with under the new VAT on property provisions? (Section 95(5))

The surrender or assignment of a legacy lease is regarded as a supply of immovable goods if it occurs within a period of 20 years from the creation of the interest (the lease) or from its most recent assignment or surrender prior to 1 July 2008. This 20 year life represents the CGS life of the legacy lease.

The question of whether a liability to VAT arises on that supply of property (i.e. the surrender or assignment of a legacy lease) depends initially on whether or not the tenant was entitled to deduct any of the VAT incurred on the acquisition of the legacy lease.

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9. What is the position where a tenant was entitled to deduct any of the tax incurred on the acquisition of the lease? (Section 95(7)(a))

The assignment or surrender of the lease is taxable if

• the tenant was entitled to deduct any of the tax charged on the acquisition of that lease or on the development of the property subject to the lease, and
• the surrender or assignment occurs within 20 years of that tenant's acquisition of that leasehold interest.

When a tenant assigns such a lease, the new tenant to whom the lease is assigned and any further assignees will likewise be taxable on its surrender or assignment during that same 20 year period following that first assignor's acquisition of the interest. The treatment of a landlord following the surrender of a legacy lease is dealt with in paragraphs 14 and 17.

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10. What is the position where the tenant was not entitled to deduct any of the tax incurred on the acquisition of the lease? (Section 95(7)(b))

Where the tenant was not entitled to deduct any of the tax incurred on the acquisition of the lease, the assignment or surrender of the lease is exempt from VAT. However, the parties to the assignment or surrender can jointly opt to have the assignment or surrender treated as taxable.

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11. What is the CGS adjustment period for legacy leases for a person who 'owns' a legacy lease on 1 July 2008? (Section 95(12)(c)(ii) and (iii))

The adjustment period for legacy leases is

• in the case of the creation of the legacy lease, the period of 20 years from creation of the lease, or
• in the case where the person holding the interest in the legacy lease on 1 July 2008 acquired it by assignment, the period remaining in the legacy lease at the time of that assignment or 20 years, whichever is the shorter.

The first 12 months of the adjustment period is treated as the initial interval. Each subsequent interval is a period of 12 months. However, if taxpayers wish to do so, they may treat the second interval as the period from the end of the initial interval to the accounting date of the business. Subsequent intervals will then be 12 months from that date.

The legislation currently states that if the property has been developed since the acquisition / creation of that interest ,the adjustment period is "20 years from the date of the most recent development of those goods" .As outlined above, Revenue accepts that this clause will not apply to legacy leases where the person who owns that legacy lease carries out a development and that development is a "refurbishment" for VAT purposes.

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12. Who is responsible for the VAT chargeable on the assignment or surrender of a legacy lease? (Section 95(8)(c))

In general terms a reverse charge mechanism operates where VAT is payable on an assignment or a surrender of an interest in property. This means that where an assignment or surrender is subject to tax, the tenant in possession of the lease being assigned or surrendered does not charge the tax. The person acquiring the interest must account for the tax in his or her return as if s/he had made the supply. More specifically the reverse charge arises where the person taking the assignment or surrender (the Purchaser) demonstrates to the reasonable satisfaction of the person making the assignment or surrender (the Vendor) that the Purchaser is a person of a kind specified in Section 95(8)(c) of the VATCA 2010.

The following is a list of those persons specified in that Section;

1. an accountable person,
2. the State or a local authority
3. a person who acquires the interest in the lease for the purposes of making any of the following exempt supplies in the course or furtherance of business:
   • an exempt supply of property or an exempt letting
   • financial services and agency services in relation to same
   • insurance and reinsurance transactions
   • public postal services
   • national broadcasting services
   • Passenger transport

Where the Purchaser is not registered for VAT, that purchaser must register and account for VAT in respect of that transaction. If the Purchaser cannot demonstrate that he is a person of a kind specified in Section 95(8)(c) of the VAT Act, the Vendor will need to charge and account for the VAT in relation to the assignment or surrender.

If the assignment or surrender is of a lease in respect of which the right to exercise the joint option to tax is conferred by Section 95(7)(b) (See paragraph 10 above) then, provided the Purchaser is a person described in Section 95(8)(c) of the VAT Act, the Purchaser will account to the Revenue for VAT arising on the Sale on a reverse charge basis.

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13. What is the tax payable where the assignment or surrender of a legacy lease is taxable? (Section 95(8)(b))

There is a formula to calculate the tax payable. The formula is -

T x N/Y

T = total tax incurred on the acquisition of the lease. Exclude tenant refurbishment  as tenant is CGS owner of same.

N = the number of full intervals, plus one, that remain in the adjustment period for the person making the  assignment or surrender at the time of making the assignment or surrender, and

Y = the total number of intervals in the adjustment period for the person making the assignment or surrender.

The taxable amount is the tax payable amount re-grossed @ 13.5%.

Where an assignee, for example, will use the property for the purpose of 100% VATable supplies he will include the VAT in both the output and input sections of the VAT return.

Any premium/reverse premium payable by a landlord to a tenant or a tenant to a landlord in respect of the assignment or surrender of a legacy lease is considered outside the scope of VAT. The VAT chargeable on such an assignment or surrender is restricted to the amount calculated using the formula as outlined above.

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14. What obligations does the person making the assignment or surrender have for VAT purposes?

The person making the assignment or surrender must issue a document to the person to whom the lease is assigned or surrendered. The document must contain -

• the amount of tax due on the assignment or surrender (in Example 5 below €450,000), and
• the number of intervals remaining in the adjustment period at the time of the assignment or surrender (in Example 5 below, 9 intervals).

This enables the person to whom the interest is assigned or surrendered to calculate the taxable amount for the transaction and also enables the assignee to calculate any tax payable on any future assignments or surrenders made by him or her.

Where a legacy lease is surrendered and the landlord grants a new lease, that lease is regarded as a new letting (please see Letting of Property - New System of this guide): the letting will be exempt unless the landlord's option to tax is exercised (the new letting is not a legacy lease). The amount of VAT chargeable on the surrender of the legacy lease will be the basis for the landlord's calculation of CGS liability in the event that the landlord does not exercise the landlord's option to tax the new letting, or on the exempt sale of the property (see Example 6).

[2] In Example 5 the tax due is €450,000. The 'taxable amount' can be calculated by grossing up this amount to 100% as follows - €450,000 / 13.5 x 100 = €3,333,333.

The adjustment period for the capital good for J is 9 intervals. This is determined in accordance with Section 95(12)(c)(iv). The 'total tax incurred' is €450,000.

The initial interval for J begins on 15 April 2012 and ends on 14 April 2013. The second interval for J begins on 15 April 2013 and ends when the accounting year for J ends, e.g. 31 December 2013 [3]. Each subsequent interval runs from 1 January to 31 December until the lease has expired.

[3] See Capital Goods Scheme for details of second interval.

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15. What is a reversion?

Where a taxable long lease was created before 1 July 2008, the landlord's interest in the property subject to that lease is regarded as the reversion on that legacy lease.

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16. What is the tax treatment of the sale of a legacy lease reversion? (Section 93(2)(a)(i))

Where a landlord sells a reversion on a legacy lease on or after 1 July 2008 the sale of the reversion is, in most cases, exempt from VAT. In such situations, where the sale of a reversionary interest is exempt from VAT there is no CGS adjustment required. However, if the property was developed by, on behalf of, to the benefit of, the landlord subsequent to the creation of the long lease, the supply of the reversion would be taxable if it occurs while the property is considered 'new' [4]) (see Supply of Property).

[4] The exemption under (Section 93(2)(a)(i)) does not apply because the property has been developed by, on behalf of, to the benefit of, the landlord. The property is one in respect of which the owner was entitled to deduct VAT. Accordingly, the exemption under Section 95(3) does not apply (see paragraph 3) and the ordinary rules regarding the taxation of a supply of the property apply (see paragraph 2)

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17. Sale of a transitional property following the surrender of a legacy lease.

Any sale of such property, following such a surrender during this period will be subject to the normal rules. Any CGS adjustment is based on the VAT charged on the surrender.

Where the sale of such a property is exempt and the parties jointly opt to tax such a supply, the taxable amount is the consideration for the supply. The normal rules for opting to tax the supply of property apply; in particular, the purchaser will be the person responsible for accounting for the VAT on the supply on the reverse charge basis.

The adjustment period to be used in relation to that transaction is the number of intervals correctly indicated in the document that the tenant gives to the landlord on surrender of the lease.

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18. What is the VAT treatment of post-letting expenses in relation to legacy leases?

A landlord who had charged VAT on the creation of a long lease or the successor to that landlord (where the landlord sold the reversion) was allowed, under the rules that applied prior to 1 July 2008, to deduct certain VAT incurred after the date of the taxable supply of the leasehold interest. The VAT in question relates to -

• carrying out services that the landlord is required to provide under the lease the value of which would be reflected in the rent on which the capitalised value was based,
• rent collection,
• any rent review, and
• the exercise of an option to extend the lease or to the exercise of an option to end the lease (break clause) provided for under the lease.

This practice is continued as regards legacy leases. If not already an accountable person, a landlord claiming input credit for such supplies may register on the basis of incurring post-letting expenses.

It should be noted that, while post-letting expenses are restricted to services provided by the landlord, the definition of services in this context is extended, by concession, to cover certain goods of the type specified in Section 2(3) i.e. the supply of electricity, gas, power, heat, refrigeration and ventilation - where, if these goods were services, their supply would qualify for this treatment.

As a concession, it is also accepted that routine general overheads of the landlord may be ascribed to legacy leases, and a portion of the input VAT incurred in respect of them may therefore be deductible. Such overheads would include office expenses and audit fees relating to the carrying out of the landlord's business as such - but do not include costs incurred in relation to the purchase or sale of reversions on legacy leases or costs relating to other exempt activities. Where the landlord's business includes both legacy leases and exempt lettings such inputs may be apportioned on a reasonable basis in accordance with Section 61. The landlord will be entitled to deduct VAT on such overheads in respect of taxable lettings.

The existing practice as regards 'shared services' is being continued for legacy leases. This arises where the landlord agrees under the terms of a lease to arrange for the receipt of the services on behalf of tenants (e.g. cleaning, security, etc.) on the basis of reimbursement by the tenants. The landlord passes on the VAT on such services to the individual tenants who can claim deductibility for the VAT to the extent that the property is used for their taxable activities. The landlord should issue to each tenant, once a year, an invoice showing VAT charged to the tenant on these services. The VAT deductible and payable by the landlord should be incorporated in the appropriate VAT return.

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19. Are legacy leases subject to the CGS annual adjustments? (Section 95(11))

Legacy leases are not subject to the 'normal' CGS annual adjustments (based on 1/20), or the provisions relating to the landlord's option to tax. (See Capital Goods Scheme and CGS - Other Adjustments). In addition, any refurbishment (development on a previously completed building) that is completed prior to 1 July 2008 is also not subject to these provisions.

However, if on or after 23 February 2010 a property which is subject to a legacy lease is used for the first time, or there is a change of use in the property, the big-swing test (Section 64(4)(a)) will apply to such legacy lease. (See Appendix B)

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20. What is the VAT treatment of 'deeds of variations' in relation to legacy leases?

A deed of variation is a deed under which the substance of an existing agreement is varied, normally in a fundamental manner. A deed of variation in relation to a lease agreement may have the following effects; variation in the property (e.g. an increase in the amount of the property that is subject to the letting), a variation in the length of the term of the lease, a variation in the rent payable under the lease, a variation in the parties to the lease, etc. The VAT treatment of the more common examples of these variations is illustrated by way of examples below. These examples generally represent situations where a deed of variation would not constitute a surrender (or a full surrender as appropriate) of a lease.

[5] Lettings are exempt from VAT. However the landlord can choose to charge VAT on the rents by exercising the 'landlord's option to tax'.
[6] Note - when the lease expires on 30 Jun 2020 D still has CGS obligations in relation to the development of the new warehouse, as the adjustment period for the new warehouse is twenty intervals beginning on 1 May 2010. See Section 64(1) and Capital Goods Scheme for further information on CGS intervals.

Updated: September 2011

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