Presentation Transcript

1. Chartered Tax Consultant Stage 3 Module 4 Land and Property Presenter Names – Michael Smith & Finbarr O’Connell 13th & 14thJuly 2012 Location Chartered Accountants House
2. VAT on Property – pre 1 July 2008 S.4 VATA 1972 VATable supply of immovable goods if: Property developed after 1 November 1972 Taxable interest greater than 10 years disposed of Disposal was in the course of business Vendor entitled to VAT input credit on acquisition or development of property, AND Economic Value Test EVT satisfied
3. VAT on Property – pre 1 July 2008 Anti-avoidance provisions apply VAT on certain disposals of property connected with development agreements Example Developer enters into agreement with farmer whereby he will build houses if farmer will transfer site to those purchasers Transactions connected Farmer must account for VAT
4. VAT on Property - Development S.1 VATA 1972 definition of development A new building is constructed, altered, reconstructed An existing building is demolished, or Some engineering or other operation or other work is carried out which adapts an existing building for materially altered use
5. VAT on Property - Development Excludes: Works not for materially altered use, e.g. road laying, fencing, draining for agricultural use General repairs and maintenance Grant of planning permission
6. VAT on Property – taxable interest Disposal of interest of 10 years or greater = supply of immovable goods Sale of freehold Grant of lease > 10 years Assignment / surrender of lease > 10 years Interests (e.g. leases) < 10 years = “service” not “goods” and exempt from VAT in absence of waiver of exemption
7. VAT – Long Leases VAT payable upfront on the “capitalised value” of the lease Three methods of valuation of capitalised value Rent * 75% * lease term Multiplier 21.27 Professional valuation
8. VAT – Long Leases VAT @ 13.5% on capitalised value and no further VAT on the rent VAT4A procedure removed VAT cashflow if both landlord and tenant entitled to full input credit Form 4B issued reverse charge by tenant
9. VAT – long leases example Henry granted John, a butcher, a 20 year lease of a retail unit for €20k p.a. rent Capitalised value: €20k * 75% * 20 = 300,000 €20k * 21.27 = 425,400 Valuation by competent valuer, say, €500,000
10. VAT – long leases example VAT @ 13.5% on capitalised value = €300k * 13.5% = 40,500 (can choose any of 3 values above) Before entering into the lease, Henry applies for a VAT4B and John enters €40,500 in both the T1 and T2 of his VAT return
11. VAT on property - EVT Applied to all leases > 10 years, including grant, assignment and surrender Purpose to ensure capitalised value of lease not less than cost of development or acquisition, particularly where no input credit for tenant
12. VAT on property - EVT EVT had to be considered for every property involving lease of 10 years or longer Failure of EVT = exempt supply and clawback of VAT recovered on acquisition and development In example, if the cost of Henry’s acquisition/development was €480,000, only third method of calculating capitalised value would pass the EVT
13. VAT on property – short leases Leases less than 10 years VAT exempt -1St Sch Para (iv) VATA 1972 Clawback landlord’s VAT on acquisition/development Waiver of exemption – charge 21% VAT on the rent to avoid clawback
14. VAT on property – short leases Waiver applied to ALL short term lets – care required Cancellation of waiver – balancing adjustment if VAT recovered > VAT charged on rent No new waivers allowed on residential lettings post 2 April 2007
15. VAT on Property - post 1 July 2008 No distinction between short and long lettings – all leases exempt with option to tax Freeholds and freehold equivalents e.g. 999 year leases – supply of goods VAT life of property and Capital Goods Scheme CGS
16. VAT on Property - post 1 July 2008 VAT4A procedure and EVT abolished No new waivers post 1 July 2008 Development since November 1972 no longer relevant – consider most recent development, occupation and use instead
17. New VAT on property - sale of freehold S 94 VATCA 2010 VAT on disposal if: Property developed (similar definition to old rules, other than minor development) Supplied in course of business The property is a “new” property
18. New VAT on property - sale of freehold No VAT registration threshold for property supplies Anti-avoidance provisions re sales connected with development agreements retained
19. New VAT on property - sale of freehold Supply of “old” property is VAT exempt Minor development – does not adapt property for materially altered use AND cost of development < 25% of consideration received on sale
20. Meaning of “new” property 5-year rule: Property new for 5 years after property “completed” (from later of first construction or most recent development) 2 year rule: Property has been sold or transferred to unconnected person after completion – new for following two years following occupation Completion – property can be used for purpose for which it was designed AND utility services are connected
21. Meaning of “new” property Uncompleted supply – always taxable. 2/5 year rules only apply post-completion Occupied = in use for purpose allowed under planning permission Sales of residential property by property developers ALWAYS subject to VAT on first sale, regardless of 2 or 5 year rules
22. New property – example 1 Property developer constructs a factory, which is completed in 2011. Sell before 2016 – new property and charge VAT on sale Sell after 2016 – no longer new and VAT exempt supply, repay VAT recovered on construction
23. New property – example 2 Property developer constructs a factory, which is completed in 2011 Lease and then sell to John in 2013 – first sale within 5 years of completion so charge VAT on sale John holds building empty for 18 months and then sells – second sale but not occupied for more than 24 months so charge VAT on sale
24. New property – example 2 John occupies building for 2 years – second sale and occupied for more than 24 months so sale is exempt If John is connected to property developer, his sale is not a second sale, so must charge VAT if sold within 5 years of completion in 2011
25. Option to Tax Exempt supply = VAT clawback for vendor on original acquisition/development cost Joint option to tax by purchaser and seller VAT charged on the sale no claw back for vendor purchaser acquires new capital good
26. Option to Tax Purchaser accounts for VAT on reverse charge basis No VAT cash flow if purchaser has 100% entitlement to VAT input credit Option is joint so purchaser’s agreement is necessary. May not be forthcoming if purchaser has less than 100% entitlement to VAT deduction
27. Option to Tax - Example A Ltd purchased new property from unconnected developer in 2010 for €2m + 13.5% VAT of €270k. Used building in its trade for 4 years and sold to B Ltd, a financial services company, for €4m in 2014. Sale is exempt with joint option to tax as second sale since completion and occupied > 24 months
28. Option to Tax – Example cont. B Ltd agrees to joint option: B Ltd self-accounts for €540,000 in T1 of VAT3 return. No simultaneous T2 entry as B carries on an exempt activity so net cost to B Ltd is €4m + €540k VAT.
29. Option to Tax – Example cont. 2. B Ltd does not agree to joint option B Ltd pays €4m for the property and no VAT return entry. A Ltd repays some of the VAT on its original acquisition in line with CGS (dealt with later)
30. New rules - lettings Schedule 1 VATCA 2010 All lettings, regardless of lease term (unless freehold equivalent), exempt from VAT with LANDLORD option to tax commercial lettings only Option to tax – no claw back of VAT on acquisition/development for landlord and 21% VAT charged on rent
31. New rules – lettings cont. Option to tax must be stated in writing to tenant Usually include in lease agreement Options to tax apply to individual properties Option to tax can be terminated in writing or automatically in certain circumstances
32. Option to tax lettings – exclusions Leases of residential properties Certain lettings to connected persons Where property occupied by person connected to landlord anti-avoidance to drip-feed VAT claw back over VAT life of property
33. Option to tax lettings – exclusions Example: A grants a lease to B, an unconnected person, and opts to tax the letting. B sublets the unit to C, who is connected to A. As C is connected to A, the option to tax the letting from A to B is terminated even though they are themselves unconnected
34. Residential Lettings-Property Developers Relief Tax Briefing 69 – Revenue concession Clawback of VAT on lease of new residential property by property developer spread over 20 years rather than upfront in Year 1 VAT charged on sales proceeds when unit is sold and no further adjustment required
35. Property Developers’ Relief VAT recovered on construction (2009) €20,000 Lease commencement date 1-1-2010 House completed 30-06-2009 Developer’s year end 31 Dec House sold €200,000 1-07-2011
36. VAT on Property – Transitional Rules Sec 95 and 96 VATCA 2010 Applies to property owned at 1 July 2008 and transaction relating to it happens post 1 July 2008 Sale of freehold – if no VAT input credit on acquisition/development, exempt sale with joint option to tax and VAT accounted for on reverse charge basis by purchaser Sale of freehold – if vendor entitled to input credit on acquisition/development, 2 and 5 year rules above re new and old properties apply
37. Transitional Rules -Assignments/Surrenders “Legacy lease” – lease > 10 years held at 1 July 2008 Post-1 July 2008 assignment/surrender has VAT consequences if tenant entitled to VAT input credit on acquisition/development of leasehold interest or, if not, if landlord opts to tax the assignment/surrender The new tenant (on assignment) / landlord (on surrender) self-accounts for VAT on reverse charge basis on provision of “document” from other party
38. Transitional rules – Waivers of Exemption Waiver in place on 1 July 2008 – continue to charge 21% VAT on rents No waivers on properties acquired or developed post 1 July 2008 Waiver automatically cancelled if letting at 1 July 2008 was to connected person unless tenant had >90% VAT recovery or VAT on acquisition/development recovered by landlord repaid over 12 years of lease commencement date (ongoing test) Waiver cancelled and cancellation adjustment potentially required on sale of property
39. Capital Goods Scheme - “CGS” Secs 63 and 64 VATCA 2010 VAT life of property – 20 years (new) or 10 years (refurbishment) VAT deductibility reflects use (taxable or exempt) to which the property is put over the course of its VAT life 1st interval – 12 months 2nd interval – to end of accounting period 3rd interval onwards – accounting periods
40. The Big Swing Special rules where taxable use in a later interval differs by more than 50% of taxable use in initial interval Adjust in year the big swing occurs Can result in large VAT refund or liability depending on % deductibility in initial interval
41. The Big Swing - Example VAT recovered in initial period (100%) €100,000 Deductible VAT over 20 years €5,000 p.a. Use periods 1-10 100% 2011 – co. provides additional financial services 70% turnover now VAT exempt.
42. The Big Swing - Example Taxable use interval 11 (9 full intervals remaining) 30% Revised deductible VAT €5,000 * 30% p.a. 1,500 VAT clawback = ???
43. CGS Record Capital Good Records MUST be kept by capital good owners – Sec 64(12) VATCA 2010 Significant penalties apply in the absence of a CGS Record Details of acquisition and refurbishment costs and annual adjustments must be recorded for each capital good Development = new capital good
44. Disposal of property – CGS Exempt disposal Deemed exempt use for remainder of VAT life May result in repayment of VAT to Revenue
45. Disposal of property – CGS Taxable disposal Either disposal of new property or exempt with joint option to tax exercised Deemed taxable use for remainder of VAT life May result in refund of VAT if less than 100% deductibility on acquisition/development
46. Disposal of property – CGS Purchaser with less than 100% deductibility may negotiate a higher purchase price to share the burden of the VAT clawback with the vendor Watch other non-VAT tax consequences of changes to purchase price
47. Lettings and CGS Option to tax rents May depend upon circumstances of tenant - fully taxable tenant - tenant engaged in exempt activities Requires care
48. Transitional assignments and surrenders Legacy lease assigned or surrendered within 20 years of creation or most recent assignment of that lease If tenant entitled to VAT deducibility on taking the lease, the subsequent assignment/surrender is VATable Assignee / landlord accounts for the VAT on reverse charge basis
49. Transitional assignments & surrenders VAT on surrender: T * N Y T = total tax incurred on acquisition of lease or most recent development of property N = No. full intervals plus 1 remaining in adjustment period at time of acquisition of interest by person making assignment/surrender Y = Total intervals in adjustment period for person making the assignment/surrender. This can NEVER be > 20
50. Remember our earlier example… Henry granted John, a butcher, a 20 year lease of a retail unit for €20k p.a. rent Capitalised value: €20k * 75% * 20 = 300,000 €20k * 21.27 = 425,400 Valuation by competent valuer, say, €500,000 VAT @ 13.5% on capitalised value = €300k * 13.5% = 40,500 John self-accounts on reverse charge basis
51. Transitional assignments and Surrenders If John surrenders the lease after 5.5 years: T = €40,500 N = 14 + 1 = 15 Y = 20 VAT on surrender = €40,500 * 15 / 20 = €30,375 Taxable amount = €30,375 / 13.5% = €225,000
52. Transitional assignments and surrenders Henry self-accounts for the surrender in his VAT3 return as follows: T1 €30,375 T2 (€30,375) if Henry intends to use the property for 100% VATable activities in future
53. Transitional assignments and surrenders John provides a document to Henry stating: Number of remaining intervals in the adjustment period i.e. 15 VAT arising on the surrender = €30,375
54. CGS – other issues Adjustment amount on supplies of capital goods to connected persons – may be avoided if purchaser agrees in writing to assume a higher VAT value for CGS purposes Transfer of business relief under Sec 20(2)(c) and Sec 26 VATCA 2010 Property still new – CGS from date of purchase Property old or legacy lease being acquired – purchaser assumes original CGS of the vendor
55. VAT on Property – Legal Issues Law Society Standard Conditions of Sale – Special Condition 3 Beware of contents if representing purchaser or tenant in particular Review for options to tax inserted by vendor or landlord Is it of benefit to purchaser to take on new VAT life of property? Review Requisitions on Title – complete as part of pre-contract enquiries before contracts/lease signed
56. Reverse Charge for principal contractors Sec 16 VATCA 2010 Applies to construction services received by principals from subcontractors from 1 Sept 2008 Subject to reverse charge Subcontractors issue net of VAT invoices Principal responsible for accounting for VAT RCT operated on net of VAT invoiced amount
57. Principal Contractors - RCT Example: Subco Ltd provides carpentry services to Big Builder Ltd under a relevant contract. The invoice was for €2,000 net of VAT – what are the companies’ VAT return entries?
58. Principal Contractors RCT Subco VAT return – no entries (WHY??) Big Builder VAT return: T1 €270 (2,000 @ 13.5%) T2 (€270) Q: What are Big Builder’s RCT obligations?
59. VAT on Property – Round Up Meaning of development Pre 1 July 2008 rules Sale Leases – short and long Waivers of exemption Assignment and surrender The EVT
60. VAT on Property – Round Up Post 1 July 2008 rules Sale of freehold / freehold equivalent Joint option to tax sale All lettings exempt – landlord option to tax Relief for residential lettings by property developers Transitional assignments and surrenders
61. CGS – Round Up Intervals The Big Swing CGS Record Taxable and exempt transactions
62. VAT on Property Legal Issues Standard Conditions of Sale – Special Condition 3 Review for purchaser/tenant implications Pre-contract enquiries