VAT on rental of residential property

D

datacopy

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Hi
I developed some property (4 dwelling houses) a number of years ago in partnership with a colleague (we set up a partnership business structure and registered same with Revenue).

We registered the partnership for VAT at the time, claimed Vat inputs on the development cost and paid VAT at 13.5% on the sale of two of the houses.

The other two houses are for sale but are being rented out to residential tenants until such time as they are sold (rent c. 400 per month per house)

I understand that even though our partnership claimed a vat input credit on the development costs that we cannot / should not charge VAT on the rental income as residential rent is exempt from VAT? Does this mean that there is no VAT liability at all on the rental income? (We just want to be sure that we are not missing some important point on this matter) May we continue to claim a Vat credit on annual partnership costs (accountancy etc)? (the partnership will continue trading until the remaining two houses are sold).

I assume that we cannot de-register for VAT until the houses are sold? as the Revenue will require a vat payment on the sale price of the remaining two houses?

Any advice would be greatly appreciated
 
I think it's more that you may be able to de-register for VAT, but Revenue may chase you for the input VAT claimed. (on two of the houses only, as two have been correctly accounted for)

I'm not a tax advisor so I could be wrong.
 
It's impossible to answer definitively without having more details of dates etc. but at a minimum, and I'm simplifying this slightly, for each year that a unit is put to exempt use (ie residential letting) the partnership owes back 1/20 of the input credits claimed on the development of that unit.

Depending on dates (as there were major changes to VAT on property rules mid-2008) ye may owe back all of the inputs claimed on those two units...

I don't mean to scaremonger but the answer is yes there are serious VAT issues in your case if it's as outlined, and you need to speak to a competent professional and quickly. You make no mention of having an accountant, but if ye do and he/she hasn't flagged this issue then you need to look elsewhere for help.
 
Thanks Mandelbrot - very valuable advice
In response to your comment re dates etc the building work commenced in 2006. The two houses now being rented were started at the end of 2007 and completed in early 2010 (done on a piecemeal basis).
I don't wish to hog your time but, based on these dates, how serious would the vat issues be? Note - I take you advice re accountant.....
Thanks again
 
datacopy said:
Thanks Mandelbrot - very valuable advice
In response to your comment re dates etc the building work commenced in 2006. The two houses now being rented were started at the end of 2007 and completed in early 2010 (done on a piecemeal basis).
I don't wish to hog your time but, based on these dates, how serious would the vat issues be? Note - I take you advice re accountant.....
Thanks again
Click to expand...

OK well the important date here is the date of completion (or first occupation) of the property, and as this is after 1 July 2008 the new VAT on property rules will apply.

This is a kind of complicated area of tax and even people who work in tax / accountancy tend to get quite bogged down in it, but the relevant bit in answer to your immediate question is this: (taken from [broken link removed])

Properties completed on or after 1 July 2008 and rented on or after that date
Where a property developer develops a residential property, that property is completed on or after 1 July 2008, and that property is rented on or after 1 July 2008, no immediate claw-back occurs. Instead, the developer will be required to adjust the VAT deductibility at the end of the second capital goods scheme (CGS) interval [2]-and each subsequent interval-until the property is sold. Example 2 below illustrates how this operates.
Example 2
Developer E constructs a house for sale. The cost of constructing this house is €1,000,000 + VAT €135,000. E deducts all of this VAT. The development of the house is completed on 15 Jul 2008. E is unable to sell the house and instead rents it out. The letting is for two years and is created on 4 August 2008. There is no immediate claw-back of the VAT deducted. E's accounting year ends on 31 December each year.
The CGS initial interval for E in respect of the property begins on 15 Jul 2008. It ends on 14 Jul 2009. The second interval ends on 31 December 2009 (end of accounting year). An adjustment arises at this point in accordance with Section 12E(5) VAT Act 1972 (as amended) as follows -
C - D
C = reference deduction amount
D = interval deductible amount (see VAT on property Guide for details)
6,750 - 0
= €6,750 payable as tax due by E for the taxable period following end of second interval:, that is, the tax is due for the Jan/Feb 2010 VAT period.
This payment essentially amounts to E paying back 1/20th of the VAT deducted in respect of the development of the property. At the end of each subsequent interval (in the taxable period following the end of each 31/12 financial year) the same amount (€6,750) will be payable by E for as long at the property is not used for a taxable purpose.

OK so the gist of all of that is that if you started letting in 2010, you will basically owe Revenue 1/20th of the input credits claimed on the development of each house let, at the end of each year from 2011 onwards. So as it stands presently you aren't in arrears or anything, but you need to get a competent professional with knowledge of this minefield of an area, to sort this out and quantify the exposure.

Also, when you come to sell each property, you may then be entitled to credit for the inputs you had to hand back, when calculating how much VAT you owe on the sale (via another fancy formula of course!)
 
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