Conor KennedyLaw Library,Four Courts

Dublin 7.

CB Richard Ellis◦ Year 2008◦ Property deals €500million◦ Comparison to 2007 - €1.9 billion◦ 2009 - €500 to €750 million ?◦ Specific performance◦ Forfeited deposits

Definitions Practical Examples

◦ Standard transactions◦ Capital good scheme◦ Leases ◦ Transitional properties◦ Capital Gains Tax issues

S.1 VATA 1972◦ A “taxable person carries out any business in

the State◦ ‘business’ means an economic activity,

whatever the purpose or results of that activity, … for the purposes of obtaining income therefrom on a continuing basis;

◦ freehold equivalent interest”- means an interest in immovable goods other than a freehold interest the transfer of which constitutes a supply of goods in accordance with section 3.

◦ Capital goods are defined as developed immoveable goods

Developed ◦ Construction, demolition, extension alteration

or reconstruction ◦ Carrying out any engineering or other

operation on land to adapt for materially altered use

◦ Significant development In excess of 25% of sales price

◦ Materially Altered Use Cusack v Minister for Local Government [unreported,

High Court, 4th November 1980] Change from solicitor’s office to dental surgery

S.2 VATA 1972 VAT shall be charged levied and paid on the supply of goods and services

effected within the State for consideration by taxable persons acting as such other than in the course of furtherance of an exempt activity

 S.3(1)(a) VATA 1972 The acquisition of the property is a supply of goods and includes the transfer

by agreement of ownership of the goods  S.3[1C] VATA 1972

The supply of immoveable property includes the transfer in substance of the right to dispose of property, whether as the owner or otherwise. It also includes any transaction where the owner of the property becomes entitled to receive 50% or more of the value of the property at any time prior to the transaction and up to five years after the date of the transaction

 S.5 VATA 1972 Any business activity which is not a supply of goods is a supply of services.

S.8 VATA 1972◦ A taxable person who engages in the supply, within the

State, of taxable goods or services shall be an accountable person and shall be accountable for and liable to pay the tax charged in respect of such supply.

 S.12 VATA 1972In computing the amount of tax payable by him in respect of a taxable period, an accountable person may, insofar as the goods and services are used by him for the purposes of his taxable supplies or of any of the qualifying activities, deduct, subject to making any adjustments required in accordance with section 12D —

the tax charged to him during the period by other accountable persons by means of invoices, prepared in the manner prescribed by regulations, in respect of supplies of goods or services to him,

Example 1 Ms Fit – Gym operator Acquires a new constructed two storey

building on 1st September 2008 Price - €5 million plus VAT of €675,000 Entire property used as a gymnasium Her year end is 31 December 2008.

Everything is taxable unless specifically exempt

 Is the property exempt? The property must not have been developed If already completed, must not be further developed

within 5 yrs prior to the current supply If sold to an unconnected party & thereafter

occupied in aggregate for a continuous 24 mths 5 yr old building which has had no significant

development or not materially altered 5 yr old building sold to an unconnected party &

thereafter occupied for a continuous 24 mths and has had no significant development or not materially altered

◦What is completed?the development of the property has reached the state where the property can effectively be used for the purposes for which it was designed

◦What is occupied?when the property is fully in use and planning permission for the development of the goods had been granted and where the property is occupied and fully in such use by the tenant

Example 1 Ms Fit has purchased a new building that

has not been previously occupied Property is subject to VAT @ 13.5%. VAT incurred on the acquisition is

deductible in accordance with section 12.

◦ Capital Goods Scheme as a mechanism for regulating deductibility over the “VAT-life” of a capital good.  Steps to be taken – Continuing entitlement  Review of the entitlement to VAT after 1st 12mths If the proportion of taxable use in 1st 12 mths (‘initial

interval’) differs from the proportion of the VAT claimed - adjustment is required.

Too much has been deducted, the taxpayer must pay back the excess.

Too little has been initially deducted, claim the deficiency as an input credit.

Quantified VAT entitlement for the first twelve months is the benchmark figure

 

◦Annual review of the vatable use of the property

◦Any change in the proportional tax use compared with the use during the initial 12 mths - an adjustment required

◦Annual adjustment is difference in the initial 12 mths and the use in the year under review.

◦VAT-life of the building is 10 years for refurbishment and 20 years in relation to new

 

Example 1  

◦ Deducts all VAT of €675,000 in Sept/Oct’08 VAT return

◦ Reviews entitlement on an annual basis. ◦ Theoretically only entitled to claim €33,750

(€675,000 /20) per annum for the next 20 years. ◦ Initial interval ends on 31 August 2009. ◦ 2nd interval - 4 mths at 31 December 2009◦ For the third and sbqt intervals ends on 31st

December. ◦ The last interval will end 31st December 2027.

Amount of VAT charged on acquisition or development

Amount of the VAT deducted initially. The date on which the adjustment period begins No. of intervals in the adjustment period. (10 or

20) Initial Interval % of deductible use, (% in 1st 12

mths) Total reviewed deductible amount,(total tax by %

of taxable use for the initial interval.) % of deductible use for each interval, Details of any adjustments under the scheme. Details of any sale of the property.

Example 2 Ms Fit Retires 1st May 2018 Has 2 offers

◦ Property developer◦ Firm of accountants

No significant development work Offer - €10 million

Property Developer◦ Redevelop

Accountants◦ 50% for its practice◦ 50% for financial services wing

Property is nearly 10 yrs old No significant development & not

materially altered We can stop here !!! Academically

◦ No relationship connection in original transaction & property occupied for more 24 mths in aggregate

Property Exempt Great But what about the Capital Goods Scheme?

VAT life = 20yrs Held for = 10yrs Therefore partial clawback of initial VAT

deducted Formula

B x N TWhere B = Total Reviewed Deductible Amt

N = No. of full yrs remaining + 1T = Total no. of intervals in adj period

Example 2 B = Totl Revd Deductible Amt =

€675,000N = No. of full yrs remaining + 1 = 9 + 1T = Total of intervals in adj period = 20

€675,000 x (9 + 1) = €337,50020

Example 2 Avoid clawback – Sell to Property Developer Therefore joint option to tax sale Vat charged on €10 million = €1,350,000 Developer also self accounts for VAT – Reverse

charge Developer’s initial interval = 1st May 2018

Example 2 Sell to accountants Don’t opt to tax sale Clawback of VAT Accountants increase sale price to compensate Additional proceeds - €375,000 CGT issues though Accountants save €337,500 ((€1,350,000/2) -

€337,500))

Sale of Old building Ms Fit retires 1st May 2014 Property owned for 5 yrs & 9mths Sells property to a philanthropist Consideration €10 million

Example 3 Property is an old property

◦ Property has been developed◦ However over 5 yrs old◦ No further development◦ Occupied for aggregate 24 mths (not really

relevant)◦ Option to tax not available

Philanthropist is not a taxable person

Example 3B = Totl Revwd Deductible Amt = €675,000N = No. of full yrs remaining + 1 = 13 + 1T = Total of intervals in adj period = 20

€675,000 x (13 + 1)= €472,50020

Sale of ‘New Building’ Ms Fit suffering from ill health Sells building and retires - 1st December 2012 Property owned for 4 yrs & 3 mths Purchaser - philanthropist Consideration €10 million Due to ill health property only occupied for 18

mths

Example 3B Property is still a “new” property

◦ The property has been developed ◦ Developed within 5 yr period◦ No further development◦ Not occupied for aggregate 24 mths (really

relevant) Property liable to VAT Consider lease first then sell

Property sold On 1st May 2029 Property not developed since acquisition 20 yr old property Property sale not taxable No Capital Goods Scheme adjustment

Ms Fit retires from business – 1st May 2014 Property now over 5 yrs old Leases to Health club franchisee Period of lease = 20 yrs

Example 5 No distinction between long & short leases Leasing of property is exempt However option to tax Option to tax exercised

◦ Insert in contract or◦ Notifying tenant in writing

Example 5 Option to tax terminated

◦ Failing to notifying tenant ◦ Agreeing with tenant◦ If landlord & tenant become connected

Except for tenants with 90% VAT recoverability◦ Used for residential purposes ◦ Notifying tenant in writing

Example 6 Ms Fit – Gym operator Acquires a new constructed two storey building

on 1st September 2008 Price - €5 million plus VAT of €675,000 Uses 70% of property as a gymnasium Lets 30% to a physiotherapist Does not opt to tax rent Her year end is 31 December 2008.

1st 12 mthsTotal tax incurred = €675,000Total revwd ded amt (70%) = €472,500Refund to Revenue = €202,500

2nd & Subseq intervalsTotal tax incurred = €675,000Base tax amt (€675K/20) = € 33,750Ref ded (€472,500/20) = € 23,625Int ded amt (ditto) = € 23,625 Adjustment = Nil

Example 6B Physio’s practice expands Ms Fit grants new lease on 50% of property in

yr 4 Need to calculate adjustment Payment to Revenue

Example 6B4th interval

Total tax incurred = €675,000Total revwd ded amt (70%) = €472,500Base tax amt (€675k /20) = € 33,750Ref ded (€472,500/20) = € 23,625Int ded amt (€33,750 x 50%)= € 16,875 Adjustment = € 6,750

Special rules Caters for a change of more than 50% in

taxable use Revenue Example Anti-Avoidance provision

Section 4C Property were subject to old rules Now disposed of or let under new rules Freeholds & ‘Freehold Equivalents’

Example 7 Doctor acquired freehold – May 2002 Price €1 million & VAT of €135,000 Used as GP surgery Did not recover VAT Sells property 1st June 2009 Consideration - €1.5 million

Example 7 VAT Analyses Not entitled to deduct initial VAT No further development since acquisition Property not chargeable However joint option to tax

Positive VAT AdjustmentFormula

E x N

TWhere

E = non deductible amountN = No. of full intervals

remaining + 1T = No. of intervals in the

adjustment period

Example 7Positive VAT Adjustment

E = €135,000N = 12 + 1T = 20

Calculation €135,000 x 13 = €87,750

20

Surrender/Assignment in a legacy lease = a supply

not entitled to deduct VAT, may be entitled to CGS adj

Tax chargeable ◦ Person entitled to deduct initial vat◦ Transaction occurs within 20 yrs

Legacy lease Adj.Period is shorter◦ Since creation of lease◦ If assigned, period remaining in lease

Tax not chargeable◦ Where not entitlement to deduct VAT,◦ But, may opt to tax (joint election)

Example 8 35 yr lease granted – 1st July 2000 Capitalised Value = €1 million Assigned to solicitor – 15th April 2012 Formula

T x N Y

T = Tax incurred on leaseN = Full intervals remaining + 1Y = Total no. of intervals remaining in adj period

Example 8T = €1,000,000N = €8 + 1Y = 20

€1,000,000 x 8 + 1 = €450,00020

Solicitor self accounts for VAT Reverse charge

◦ Where not entitlement to deduct VAT,◦ But, may opt to tax (joint election)◦ Person taking the surrender/assignment

accounts for VAT under reverse charge

Transitional measures Section 7B Applies to waivers already in place No new waivers after 1st July 2008 (but

opt to tax rules) Wavier ceases to apply to lettings

between connected parties Relieving provisions

◦ Minimum level

Example Mr Scholar acquired a property in May

2005 Price €1 million & VAT of €135,000 Short terms lets to a grind school

company which he owns Waived exemption Annual rent is €30,000 & VAT of €6,300

Minimum VAT – CalculationFormula

A – B12 – Y

WhereA = VAT deducted on the acquisition of propertyB = VAT paid to 30th June 2008Y = No. of full years since waiver

Minimum payment =A = €135,000 B = €19,950 (€6,300 x 3 +

(€6,300 x 2/12)Y = 3

Result€135,000 – €19,950 = €12,783

12-3Mr Scholar must charge an annual rent that produces a VAT liability of €12,783

No VAT on transfer Both parties are taxable persons CGS implications

Principal elements of a letting◦ A substantially passive activity ◦ For an agreed period◦ Payment of consideration◦ Grants right to occupy property as owner◦ Can exclude others from that enjoyment◦ Defined area of space.

Already seen additional consideration to compensate vendor for clawback of VAT on the CGS now taxable to CGT.◦ Must factor this cost into compensation for CGS

Uncertainty regarding base cost for CGT where VAT entitlement changes◦ Pragmatic approach

If not entitled to VAT credit◦ Capital Allowances on VAT inclusive cost of property

If entitled to VAT credit◦ Capital Allowances on VAT exclusive cost of property

Position regarding change in VAT recoverability?