Reclaiming VAT on investment property

Thanks for that but im none the wiser-let me put a scenario to you and then ask you for a simple yes or no answer to the question posed.
A confused man buys a house property for 100000 euro which he intends to let
Prior to buying he has read in a financial magazine that if he registers for vat he can reclaim the 13500euro.vat on the purchase price
He is aware that he will have to make a vat return every two months and that he will have to charge vat on the rental income he receives.
He is attracted by the 13500 interest free loan from the revenue-he could do with the money now!!
So he registers for vat and over the years gradually pays off all the 13500 ,some of it through paying vat on the rental income, the balance by way of a lump sum to the revenue commissioners.
He wanted to repay it because he wanted to a vat bill of nil.
He now deregisters for vat
One year later he sells the property.

QUESTION (NO FUDGING PLEASE)- Will he be liable for vat on the sale?
 
simple answer yes you will obliged to charge vat on the selling price but that is a cost for the buyer in the same way it was a cost for you. you used the property for a taxable supply which means you could recover the vat cost incurred. your prsopective buyer could be doing the same thing????

fyi do not believe financial magazine especially on tax issues
 
4. Was the person who is disposing of the interest or creating the lease entitled to an input credit? YES THE INDIVDUAL RECLAIMED THE VAT ON THE PROPERTY

The answer to this question is NO. They were not entitled to reclaim the Vat on the property as they were not making a taxable supply of the property.

However they were entitled to waive the exemption to VAT on short letting and then get the VAT back, this is very different. They are then governed by the waiver of exemption rules, this allows deregistration and removal of the property from the VAT net.
 
[QUESTION (NO FUDGING PLEASE)- Will he be liable for vat on the sale?[/quote]

Simple answer, provider you deregister before the sale NO you do not need to charge VAT
 
Arch

A short term letting with a waiver in place is a taxable supply. As a result the owner has an entitlement to claim an input credit, without the waiver in place the letting would be an exempt letting as per the 1st Schedule VATA 72 and the consequences would be no entitlement to an input credit. Having an entitlement to an input credit is a tax jargon way of saying you can get the vat back, in effect they are the same thing.

Here is an extract from the Irish Taxation Institute 2nd year VAT text book re. exempt lettings

7.8.5 Other implications if waive VAT exemption
"Where a person grants a short-term lease in a property and waives the VAT exemption in relation to short-term lettings, the property is brought into the “VAT net”. This means that a subsequent disposal of an interest in the property will be liable to VAT (subject to the Economic Value Test being passed if the subsequent disposal is by way of a long lease.) "

Deregistration to remove property from the vat net if it were possible would have every landlord in the country doing it and revenue losing out. one of the reason for s.4 of the act being so complex is that its is full of anti-avoidance rules to prevent wise guys trying what you are suggesting
 
Thanks Bazermc,
the answer to your question (3) will in my case be 'NO'- can I take it then that if I dispose of the property in less than 10 years and pay off all the original vat lump sum that I can then sell the property without having to pay vat on the sale,that is assuming that legislation on this issue remains as it is?
 
bazermc said:
Deregistration to remove property from the vat net if it were possible would have every landlord in the country doing it and revenue losing out. one of the reason for s.4 of the act being so complex is that its is full of anti-avoidance rules to prevent wise guys trying what you are suggesting
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In what what is there a loss of Vat to Revenue?

[email protected]
 
Parnell

your business is renting and then selling property (not your own private residence). in order to recover vat on the purchase you were in business to rent the property on and now you want to sell it you are still in business therefore i find it hard to see how the answer to your question 3 is no
unless you diverted the property to your private residence for say a few nights then sell it even then i reckon there is anti-avoidance against doing that
 
bazermc said:
Arch


Bazerc your quote is correct, but the legislation still allows the return of the VAT and deregistration removing the property from the VAT net.

Secondly Bazerc. I might take insult from being called a wiseguy, but since it is coming from a mere first year student of tax (guess you were exempt from part one) and since I am for over 10 years an Associate member of the Institute of tax, I must appear to be a very wise guy compared to you.

Thirdly I take it you are a tax junior in a big 4 practise, I am sure your superiors would be disappointed to see you arguing a case by using the institute tax book. Come on if you are ever going become a real tax consultant like me, you will have to learn to read the legislation.

Fourthly please read Section 7 of the VAT act it is this section which deals with the Waiver of exemption, not Section 4.

Stuart, You are correct there is no loss of VAT to the Revenue by allowing an individual register for VAT waive their exemption and return the VAT to the revenue and deregister.

Parnell once again yes your accountant is correct

Finally Baxermc, please before replying read the relevant sections of the VAT act and if you continue to have difficulty understanding same consult with some one in your firm who has a little more experience also I think your earlier reply where you advised the viewer to trust you as your were an accountant and a tax consultant with a big 4 firm is a little exagerated a bit like a first year medical student saying trust me I am a doctor and specialist.

The one you call wiseguy.
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I for one, find this a very interesting debate, having a similar professional background as the two protagonists, and also being a landlord who has already reclaimed VAT on a new build.

I do not profess to be a VAT expert, but I agree with Arch’s interpretation – an investor can reclaim the VAT on a new build, deduct VAT from the rents received on short-term lettings and this is paid to the Revenue, once the original liability is extinguished, you can de-register for VAT, and then sell the property without recourse to charging VAT.

Again, just from my reading of the changes in 2005 legislation, appears to address the issue of VAT avoidance on ‘self-supply’, that is the where a property is taken out of taxable us and made subject to VAT exempt letting. The purpose of s100 is to ensure that a ‘VATable property’ (i.e. one in which a taxable interest is held) remains in the VAT net, and to ensure that any sale of such property (the disposal of the taxable interest) is subject to VAT.

The example I would think of for this case, is - I’m a developer, I develop a site by building a block of apartments on the site, I am liable to charge VAT on the sale of those apartments, but to artificially boost my developers profit, I retain 5 of the apartments for personal use (to let as a landlord) , and subsequently sell them 5 years on without charging VAT. By retaining the 5 apartments, I have created a ‘self-supply’ and moved the VATable property into a VAT exempt letting position, thus avoiding the VAT obligations on my development.

However, for an investor, I am being charged VAT on the supply of the property by the developer - this is an arms length transaction. VAT is declared by the developer on the sale. However the property is always a non-vatable transaction from the investor, and cannot be apportioned to a vatable activity. If I choose to reclaim the VAT, and repay as above, provided I de-register prior to sale, VAT is not charged on the ultimate sale.

I would temper this that legislation surrounding this is liable to change, and as this model provides both an Income Tax (tax declared on rents net of VAT) and cashflow advantage, I could see the revenue commissioners possibly introducing an interest charge on the initial reclaim to negate the advantage. I can also see if the scheme is subject to abuse i.e. I buy property A, reclaim VAT, use as deposit on property B, reclaim VAT on property B, use as deposit on property C, and so on, then the scheme could be likely to significant change due to the loss of tax revenues.

If a person elects to reclaim VAT on a new build, they will have to charge VAT on all lettings (new and second-hand, whether or not they reclaimed VAT on all of them) if they have other properties.

Finally, I will add, I am not a VAT expert, this is just my reading of this, and you should seek professional from a reputable tax consultant prior to any decisions. VAT on property is highly complex, and other parties may give you different interpretations of the legislation


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Thanks John, your contribution makes a lot of sense- thanks to all who wrote to this topic- I am a wiser man- time will tell if by registering for vat i am to become a wealthier man!!!
 
Thanks for that, Parnell – I would just add that what the Revenue Commissioners are trying to achieve is a lockdown on VAT avoidance schemes. If BazerC’s interpretation is correct (and I’m not saying that it is incorrect), then the VAT on the property could potentially double i.e.
- developer pays VAT on sale,
- purchase reclaims the VAT,
- purchase then repays VAT from rents received, and /or lump sum payment,
- purchaser then de-registers
- (as per Bazer) purchaser re-registers for VAT and charges / deducts VAT from ultimate sale of property

This methodology would then appear to be anti-competitive, as it is a penalising effect on the taxpayer and would be open to challenge in the European Court, if successful, would probably have the effect of opening the door for court claims against the Revenue Commissioners. This is not without precedent – to my recollection, there have been two major ‘rowbacks’ on tax treatment in the last year a) Inland Revenue v MARKS & SPENCERS re use of losses within a group company structure, and b) VAT on Canteens within companies, in which I believe the Revenue Commissioners have already altered their treatment of same.

Again,just my opinion, not an authorative view. I agree, thanks to all parties, who wrote on this topic
 
Arch

FYI i am AITI and ACCA for some 20 years now and a tax director, i do however find the institutes book v helpfull, sometimes it is neccessary to go back to basics

I had a good read of section 7 VATA and did not come to the same conclusion as you, i could not find any wording relating to cancelling a registration and avoiding vat on the subsequent disposal. perhaps you could point out which subsection it is in.....i am using the 2005 fa edition

i therefore had to go back to section 4 to come to my conclusion

my understanding is: given the indirect nature of the vat system vat must be charged on the sale of freehold in the above circumstance, why? because otherwise vat on the particular property would never be recovered by the exchequer. i.e when the property was built and vat costs incurred and recovered by the builder the builder then charged on vat to the buyer and again vat was recovered by the landlord now the landlord did not charge vat on subsequent disposal based on your conclusion the property is now leaving the vat net and the government missed thair cut of tax receipts and of story.
 
given the indirect nature of the vat system vat must be charged on the sale of freehold in the above circumstance, why? because otherwise vat on the particular property would never be recovered by the exchequer. i.e when the property was built and vat costs incurred and recovered by the builder the builder then charged on vat to the buyer and again vat was recovered by the landlord now the landlord did not charge vat on subsequent disposal based on your conclusion the property is now leaving the vat net and the government missed thair cut of tax receipts and of story.


Transaction 1 - Builder pays VAT of €27,000 on a new build house of €227,000

Government VAT receipts = €27,000

Transaction 2 – Investor waives exemption to VAT and reclaims €27,000 on his new investment property worth €227,000

Government VAT receipts = - €27,000, nett position now nil

Transaction 3 – Investor deducts VAT on rents received at 21%, and pays a lump sum payment giving a total of €27,000 of VAT repaid to government

Government VAT receipts = €27,000 (same as transaction 1)

Investor now de-registers for VAT

There is no loss of tax receipts.
 
THe Revenue got there VAT on the RENTS and if this does not equal the VAT orginally reclaimed then the balance of the VAT orgially reclaimed must be returned prior to deregisration.
 
My reply - Transaction 3 – Investor deducts VAT on rents received at 21%, and pays a lump sum payment giving a total of €27,000 of VAT repaid to government

Government VAT receipts = €27,000 (same as transaction 1)

Your question - THe Revenue got there VAT on the RENTS and if this does not equal the VAT orginally reclaimed then the balance of the VAT orgially reclaimed must be returned prior to deregisration.

That's exactly what I said in my reply!
 
John,

I was replying to earlier post I did not see your post as you posted at about the same time as I.
 
What is the cost for CGT purposes where VAT was reclaimed on the initial purchase of a property?

Many thanks

A
 
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