Transitional measures applying to legacy leases
How to account for VAT on legacy leases
This page sets out the responsibilities, obligations and the tax payable on the assignment or surrender of a legacy lease.
Who is responsible for the VAT chargeable on the assignment or surrender of a legacy lease?
In general terms, a reverse charge mechanism operates where Value-Added Tax (VAT) is payable on an assignment or a surrender of an interest in a property. This means that where an assignment or surrender is subject to tax, the person acquiring the interest accounts for the tax in their VAT return (reverse charge). Generally, the tenant in possession of the lease being assigned or surrendered does not charge the tax.
More specifically, the reverse charge arises where the person taking the assignment or surrender demonstrates to the reasonable satisfaction of the person making the assignment or surrender that the assignee, landlord is a person of a kind specified below:
- an accountable person
- the State or a local authority
- 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 assignee, landlord is not registered for VAT, they must register and account for VAT in respect of that transaction.
If the assignee, landlord cannot demonstrate that they are a person of a kind specified above, the assignor 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 joint option to tax has been exercised, the assignee, landlord accounts for VAT arising on the assignment, surrender on a reverse charge basis. This is provided that the assignee, landlord is a person described above.
VAT obligations for the person making the assignment or surrender
The person making the assignment or surrender must issue a document to the person to whom the lease is assigned or surrendered (assignee, landlord).
The document must contain:
- the amount of tax due on the assignment or surrender
- the number of intervals remaining in the adjustment period at the time of the assignment or surrender.
This enables the assignee, landlord to calculate:
- the taxable amount for the transaction
- 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. 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 Capital Goods Scheme (CGS) liability. This occurs when the landlord does not exercise the landlord's option to tax the new letting, or on the exempt sale of the property (see the example under Sale of a property following the surrender of a legacy lease).
What is the tax payable where the assignment or surrender of a legacy lease is taxable?
There is a formula to calculate the tax payable. The formula is:
(T x N) / Y
T = the 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.
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.
- Example
Business X grants Business Y a 35-year lease on 1 July 2000. VAT of €1million was charged on the capitalised value of the lease, all or part of which VAT was deducted by Business Y.
Business Y is still the tenant (and so has the interest in the property) on 1 July 2008. The adjustment period for the legacy lease is 20 years from 1 July 2000.
On the 15 April 2012, Business Y assigns the lease to Business J, a retailer. The assignment is taxable on the reverse charge basis, as it occurs within the 20-year adjustment period.
When the assignment is made by Y to J on 15 April 2012, the tax payable on the assignment or surrender of a legacy lease is calculated as follows:
(T x N) / Y
T = €1,000,000
N = 9 (8 full intervals remaining + 1)
Y= 20
€1,000,000 x 9/20 = €450,000
Tax payable = €450,000
The taxable amount is €3,333,333 (450,000 re-grossed @ 13.5%)
Obligations for J (the assignee)
The assignment is reverse charged, which means that J is liable to account for VAT of €450,000 on the supply in its Mar/Apr 2012 VAT return.
Where J uses the property for the purpose of 100% VATable supplies, he includes the €450,000 VAT figure in both the input and output sections of the VAT return.
The adjustment period for the capital good for J is nine intervals. 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, for example, the 31 December 2013. Each subsequent interval runs from 1 January to 31 December until the lease has expired.
Next: Capital Goods Scheme (CGS) and legacy leases