As we are all aware, the new legislation for VAT on property came into force on the 1st July 2008. In relation to lettings, the letting of property is now exempt; however a landlord can opt to tax a given letting. The old procedure where one could waive the exemption on short-term lettings and also the VAT4A procedure and EVT on long leases is no longer applicable.
In relation to the option to tax, it is important to note, that this option does not apply to “residential lettings” or the lettings between “connected parties”. Unlike, the old waiver of exemption, the option to tax is property specific, you can now opt to tax a given property.
A waiver of exemption applied to all short-term lettings, the benefit of such a waiver was that it allowed a landlord to reclaim the VAT incurred on the purchase/development of a given property. Cancelling such a waiver required the landlord to pay a cancellation sum to the Revenue, the amount being the vat originally reclaimed on the purchase less the vat paid to Revenue from the initial letting to cancellation of the waiver.
In many cases, the landlord would cancel his waiver at the point which the vat reclaimed on the purchase equalled the vat charged on lettings, thus the cancellation sum was Nil. However, it is important to note that prior the changes effective 3 June 2009; a landlord could choose never to cancel the waiver of exemption.
New rules for certain property transactions involving waivers of exemption came into effect on the 3rd June 2009.
The new legislation is to ensure that the VAT claw-back on the sale, disposal or ending of a landlord interest in a property (which were subject to a Waiver of Exemption) is not deferred indefinitely. For example;
If a landlord sells a property (subject to a waiver) without having cancelled his waiver of exemption, the waiver will be deemed cancelled at the date of the sale.
Where a property, subject to a waiver has been sold since 1 July 2008, the waiver will be deemed cancelled as at 3 June 2009.
In respect of the Capital Goods Scheme, no further vat adjustment will arise in respect of a property where the waiver has been cancelled or deemed cancelled by virtue of the new rules.
Take a scenario where a person who bought/developed a property on 1 May 2001 (pre 1 July 08), at this time they waived their exemption to charge VAT, reclaimed VAT inputs on the development/purchase and thus charged VAT on the subsequent lettings.
If this given property is then sold post 1 July 2008, and at the time of the sale the property is deemed an “OLD” property under the new VAT on property rules, this sale is VAT exempt, and combined with the landlord not cancelling his “waiver of exemption” prior to the sale, the potential claw-back to VAT could be deferred indefinitely for as long as the “waiver of exemption” stayed in existence even though the landlord has disposed of the property in which the “waiver of exemption” was initially in respect of.
The new legislation aims to cover every scenario to ensure no loop-hole exists where the VAT claw-back could be avoided or indefinitely deferred.
The effect of these changes are best outlined by example, below I have covered a number of scenarios and referred to the applicable legislative reference.
Joe cancels his Waiver of Exemption and subsequently sells this property.
Once Joe cancels the “waiver of exemption” he is liable to pay the cancellation sum i.e. the difference between the VAT inputs claimed on acquisition/development and the VAT outputs charged on rentals.
Per Sec. 7B (2) the “adjustment period” ends for all properties subject to that waiver i.e. the “adjustment period” ends once a “waiver of exemption” is cancelled.
Say the given property was acquired on 1 Feb 2001 and then sold 1 August 09, the property is >5yr old thus an OLD property under the new VAT rules, thus no VAT charged on the sale.
Assume Joe cancelled his “waiver of exemption” on 1 Dec 08 and paid the cancellation amount at that time. A CGS adjustment which would normally arise on the sale does not become payable as the “waiver of exemption” has been cancelled prior to the sale.
As noted above, cancelling the “waiver of exemption” ends the “adjustment period” and thus CGS adjustment/claw-back does not arise under Sec.12E (7)(b).
Joe sells a property (subject to a Waiver of Exemption) and then subsequently cancels his Waiver of Exemption.
Joe must ascertain is the disposal subject to VAT under 2/5 year rule.
If it’s a taxable sale, then the VAT charged on the sale will be taken into account (offset) when Joe subsequently cancels his “waiver of exemption” and is subject to a cancellation sum.
For example, Joe sells for €1m, VAT charged of €135K, however the cancellation sum arising is only €60K, then no tax due as the VAT on sale exceeds the VAT due on cancellation of the “waiver of exemption”.
If it is an exempt sale, then Sec.12E (7)(b) applies to recover a portion of the inputs, this claw back under Sec 12E (7)(b) will be taken into account (offset) when Joe subsequently cancels the “waiver of exemption”. Joe effectively gets a credit for VAT paid on CGS claw back under Sec 12E (7)(b) when paying the cancellation sum to avoid a double tax charge.
For example, if the CGS claw-back B*N/T is €40K, yet the cancellation sum per above is €60K, Joe must pay the €40K arising under Sec.12E (7)(b) re CGS and an additional €20K to make up the total €60K due re the cancellation of the “waiver of exemption”. Joe does not have to pay €40K re CGS and then a further €60K re cancelling his “waiver of exemption”.
B = VAT reclaimed on initial acquisition/development
N = Number of years remaining in Adjustment Period + 1year
T = 20 (Adjustment Period)
Joe owned a property (subject to a “Waiver of Exemption”) on 1 July 2008, by the 3rd June 2009 he had sold this property. Joe’s “Waiver of Exemption” is deemed automatically cancelled on the 3rd June 2009.
The automatic cancellation here arises due to Sec 7B(7), it applies because on 1 July 08 Joe owned a property (which was the subject of his “waiver of exemption”) and on 3rd June 09 he no longer owns the property in which the “waiver of exemption” was in respect of.
The cancellation under Sec 7B(7) on the 3rd June 09 now requires Joe to pay the cancellation sum, which in the absence of Sec.7B(7) could have been deferred indefinitely.
In the absence of Sec.7B(7), Joe could have chosen never to cancel his “waiver of exemption”, even though he no longer held a waiver property, failing to cancel the “waiver of exemption” avoids triggering the cancellation claw-back, so Joe could have indefinitely avoided the cancellation sum.
The legislation now ensures that where you owned a waiver property on 1 July 08, but on 3 June 09 no longer own any properties which are subject to that waiver then the waiver is deemed cancelled on 3 June 09.
The cancellation sum therefore must be calculated and returned on the May/June return which is due by July 19th 2009.
Joe has a number of properties (say 4) that are the subject of his Waiver of Exemption, he sells one of these between 1 July 08 and 3 June 09, he does not cancel his WoE as he still owns the other three properties.
Under Sec 7B (8) and for the purposes of a CGS claw-back, the sale of this one property is deemed to occur on 3 June 09.
We assume the sale is exempt as it is beyond the 2/5yr rule, the CGS claw-back is triggered and is calculated as B*N/T.
B = VAT reclaimed on initial acquisition/development
N = Number of years remaining in Adjustment Period + 1year
T = 20 (Adjustment Period)
The “waiver of exemption” is allowed to continue in relation to the other properties, as they are still owned and let.
The CGS claw-back would not arise if Joe were to cancel his “waiver of exemption” prior 1 July 09 or if he in conjunction with the purchaser opted to tax the sale under Sec.4B (5).
Note cancelling the “waiver of exemption” pre 1 July 2009 could potentially give rise to a cancellation sum/claw-back in relation to all four properties when only one property was being sold. Therefore, if trying to avoid a CGS claw-back, it would be more appropriate to opt to tax the particular sale of the one property and leave the “waiver of exemption” in place for the other properties as they remain let.
Joe owns property on 3 June 09 which is subject to a Waiver of Exemption, he disposes of one or more of these properties after this date
When Joe sells these properties, Sec.7B (9) applies.
If the sale is exempt and in the absence of an election opting to tax the sale, the normal CGS rules apply, this results in some of the VAT being clawed-back (B*N/T).
B = VAT reclaimed on initial acquisition/development
N = Number of years remaining in Adjustment Period + 1year
T = 20 (Adjustment Period)
Note it is the exempt sale that triggers the CGS claw-back/adjustment above.
If Joe has no other properties at this date his “waiver of exemption” is deemed to be cancelled as he has no interest in any properties subject to a “waiver of exemption”.
The cancellation sum is now payable also, in order to avoid a double tax charge; the tax paid re the CGS adjustment can be offset against the “waiver of exemption” cancellation sum.
Where this sale was a taxable one, i.e. the vendor and purchaser elect to tax the sale; the VAT charged on the sale is deductible against the tax arising on the cancellation of the “waiver of exemption” (which occurs due to automatic cancellation of “waiver of exemption” on date of sale).
As you can appreciate from the given examples, dealing with the transition from the old to new VAT on property rules is proving quite complex.
In light of the recent changes in legislation it is important to be aware of your client’s property transactions where waivers of exemption are involved. The period between 1 July 08 to 3 June 2009 is particular relevant.
You should be familiar with what constitutes a vatable or exempt sale of property under the 2/5 year rules.
Be conscious of when you can elect to opt to tax a sale of property and also the implications of the CGS claw back where the sale is exempt.
Where a “waiver of exemption” is cancelled prior to an exempt sale of the property, the adjustment period ends and thus only the cancellation sum is payable when the waiver is cancelled.
Has your client sold any properties (which were subject to a waiver) and not yet cancelled the “waiver of exemption”. The legislation provides for the waiver to be automatically cancelled as at 3 June 2009 and the cancellation sum payable.
Where a property subject to a waiver is sold post 3 June 09, and the individual has no other interest in a property subject to the waiver, the waiver is deemed cancelled when this property is sold and the cancellation sum becomes payable.
We have made every effort to ensure that the information provided in this article is accurate but we cannot accept responsibility for the consequences of any action you take in reliance on its contents. If following the article you have any matters that you would like to discuss please do not hesitate to contact me.
Desi Foley ACA AITI is a Senior Tax Manager with FPM Chartered Accountants having offices in Dundalk, Newry, Dungannon and Belfast.
