VAT Capital Goods Scheme

Capital Goods Scheme

The rules on VAT and property were fundamentally altered in 2008, by the introduction of a Capital Goods Scheme. The purpose is to ensure that VAT recovered on the acquisition or development of property, is referable to specific lifetime of use for a purpose which is subject VAT.

The scheme seeks to allow the VAT recovery during the “life” of the property.  If the property is not used for a vatable purpose throughout the entire period, then an adjustment is made to the original VAT deducted on acquisition or development.  It requires an annual review of the use to which the property is put, from the perspective of its use in a vatable business. If it changes, an adjustment may be required.

The adjustment applies during the  relevant period, which is generally 20 years in the case of development.  Each period is referred to as an interval.  In each period, the vatable use is compared with that in the initial period. An adjustment is made relative to that period.  The adjustment relates only to that period, generally 1/20 of the whole. The adjustment is not required, if there is no change in vatable use in that period.

Applies where Developed

The Capital Goods Scheme is applicable where capital goods (property) have been developed, acquired or refurbished and VAT was charged.   VAT may be charged on the acquisition price on the cost of  development.  It is also applicable on the transfer of a business.

When development expenditure is incurred, a capital good is created.  Where a property is already, further development is refurbishment.  Refurbishment has a life of 10 years.   A one-time refurbishment needs to be distinguished from development expenditure creating a new capital good.  It should also be distinguished from non-capital expenditure, such as repairs.

FA 2012 provides that development comprising refurbishment within the capital goods scheme life, does not result in a new 20-year clock starting.  Refurbishment  is defined as development of a previously completed building structure or engineering work.  The refurbishment creates its own 10-year capital goods scheme life, by which the VAT incurred in the refurbishment itself is reviewed for a period of 10 years.

Operation

VAT may be recovered upon the original acquisition or development, if the property is intended to be put to a vatable use.  The position is then reviewed  annually. The question is not simply one of vatable use or not.  There may be part  vatable use,, where a building is used as to a proportion for a vatable use.  If the use is greater than or less than that in respect of the original VAT claim (reflecting the original degree of VAT use or intended VAT use) an adjustment arises.

At the outset, the assumed VAT recovery rate is calculated. After the first year, the actual VAT recovery rate is calculated. Annually thereafter, the comparison is made relative to the VAT recovered in the initial period. In each case, if there is a difference between the VAT actually recovered and assumed initial VAT recoverable, adjustment is made.

The sum is divided by the number of intervals, generally 20, for capital development and 10 for refurbishment.  The adjustment period ends after its natural expiry or earlier sale. The adjustment is by way of an additional input or an additional liability to VAT, as the case may be.

If the capital good is not used during the initial period, then the sum allowed by way of recovery is based on the intended use of the property.  This accords with general principles whereby intention at the outset, rather than actual use is sufficient. If the property is not used in the subsequent period, the proportion applicable, is that for the last year in which it was actually used.

The later periods are  measured by reference to the accounting year end.  This allows the available figures to be used to measure the proportionate vatable and non-vatable uses. If the change of use is to an exempt or partly exempt use or from an exempt use to a non-exempt use, the adjustment arises.

Sale in Adjustment Period

If the property is sold during the adjustment period, the seller is deemed to use the property for a vatable purpose for the remainder  of the adjustment period.  The effect may be to allow a refund of VAT.  The refund is proportionate to the remainder of the interval. It  may arise where there wasn’t previously full VAT deductibility.

The supply of old property is exempt.  This is property that has been completed for more than 5 years and has not been developed in that time.  Only works that adopt the property for a materially changed use constitute development in this context.

In order to be an old building the building must have been completed more than 5 years ago and must not have been significantly developed. There may have been insignificant development only, within the last 5 years.

The sale of a used second hand building is exempt.  In order to be considered a second hand building, the building must

• have been completed in the 5 years prior to sale,
• had been occupied for at least 2 years after completion; and
• not significantly developed;
• not have been the subject of a transfer  between two unconnected persons.

Capital Good of Purchaser

If  there is a sale during the adjustment period or if VAT would have been chargeable, the property then becomes a capital good for the purchaser.  His adjustment period is 20 years commencing from acquisition in respect of the VAT incurred. A period of 20 intervals commences.

If the property is sold within the adjustment period and the sale is exempt from VAT, there is deemed to be exempt use for the remainder of the adjustment period.  There may be accordingly, an  adjustment for the remainder of the period.

An option to tax prevents the above treatment.  In effect, it allows the seller to pass on the VAT, cost that would otherwise be charged to him.  The effect may be to increase the price in some cases.  If the purchaser has full VAT deductibility, it should not cause an immediate cash liability.

If the sale is opted to the tax, the purchaser acquires a new capital goods, based on the price.  If he subsequently makes an exempt sale, there may be a greater VAT claw-back.  In the case of a part sale, the price is adjusted between the part sold and the part retained.

Changes in Deducts

If there is a major change in amount of deductibility, this period may be substituted under anti-avoidance legislation, as the new initial period in respect of which VAT adjustments are to be made in the future.  A variance of 50% in the recovery rate is required, before this anti-avoidance applies.

Where the option to tax is cancelled during the adjustment period, the property becomes exempt.  The consequence is that the person is deemed to have supplied the property to himself for use for exempt purposes for the remainder of the period.  There is a notional acquisition of the property, creating a new notional capital good.

The person concerned, who holds the notional capital goods must pay the Revenue the equivalent of the tax referable to the exempt remainder of the period.  The period for the new notional capital good is the number of intervals remaining in the old capital good period plus one. The landlord is not entitled to recover VAT repaid unless and until he commences to use the property for a vatable purpose.

Letting

Where property is let, without an option to tax, it is potentially exempt so that the landlord’s deductibility is nil.  If it is later opted to tax, it becomes a fully vatable use.  The landlord is deemed to supply the property to himself when he opts to tax. It is deemed to be taxable for the remainder of the adjustment period.

The tax incurred on the notional new capital good, is the additional VAT which arises by reason of the deemed supply.  He is deemed to pay this tax, although it has no consequences unless the position is later changed, the adjustment period for the new notional capital good is the number of periods remained in the adjustment period for the original capital good.  VAT recovered need not be repaid unless and until the property is later used for a VAT exempt purpose.

Where a property is let, that had been used previously for a business purpose without an option to tax, the annual adjustment or the above anti-avoidance kicks in.  Where the anti-avoidance on a change of percentage of over 50% applies, all VAT claimed will become repayable.  In other cases, it will continue to be payable over the remainder of the adjustment period.

Transfer of Business

The general treatment on transfer of a business applies.  There is deemed to be no supply, where the transfer would have been taxable, but for the treatment on transfer of a business.

The transferor is treated as if it had made a vatable sale.  The transferor is deemed to acquire the asset, having charged the VAT that would have arisen on the sale, but for transfer of business relief.

The purchaser is deemed to have acquired a capital good No adjustment is required in the first year if the transferee would not have been entitled to recover all the VAT, if charged.  It has to pay the Revenue the amount which it would not have been able to recover, if VAT had been charged.

If the transfer would have been exempt but for the treatment, the transferor is not deemed to have used the property for an exempt purpose for the remainder of the period and is not obliged to repay VAT which he recovered on purchase.  The purchaser takes over the capital goods obligations of the property. The seller must give the buyer the capital goods records.

Inter Group & NAMA

Where there is a sale between connected persons, such as in a group, the VAT on the sale has to be at least the VAT charged on acquisition. This is to avoid sales at undervalue between connected parties, which might otherwise reduce the VAT recoverable.  The VAT charged is  reduced by the number of intervals that have passed since the original development etc.

2013 Finance Act deals with transfers between connected parties for the purpose of the capital goods scheme adjustment.  The connected purchaser must succeed to the vendor.  Where the purchaser agrees to step into the shoes of the vendor, the sale is not deemed to be a supply.

In the case of certain transfers under the NAMA Act, parties to a connected sale that would otherwise cause an adjustment to arise, may enter into an agreement that the purchaser takes over the capital good.  The purchaser succeeds to the seller’s position for the remaining intervals.

Anti-avoidance provisions are strengthened in Finance Act 2015 in respect of the supply of uncompleted properties between unconnected persons. A connected vendor must account for an adjustment based on the difference between the VAT arising on the sale of the uncompleted property and the VAT incurred by the vendor on acquisition and development of the uncompleted property in addition to the VAT due and the sales proceeds. In this context, parties may not enter a written agreement by which the purchaser assumes the VAT history and capital good scheme obligations of the vendor.

Tenant Capital Goods

A tenant may carry out refurbishment and thereby create a new capital good.  A tenant who carries out refurbishment works may enter an agreement with the assignee or landlord, that the latter takes over the capital good.

The capital goods record is to be provided.  If this not done, the tenant may have to repay VAT claimed on the refurbishments on the basis of the adjustment period remaining.  The same principle applies on assignment or surrender. This  is effectively treated as a exempt sale, causing a potential claw-back.

In the case of refurbishments, the adjustment period is 10 years.  If the capital good is completely destroyed, no further adjustments arise.  The same applies to a refurbishment which is entirely removed in the context of assignment.

Receiver

Prior to the Finance Act 2013 the borrower in respect of whom a receiver had been appointed over assets was the accountable person.  The receiver is now liable to register and make returns remitting VAT due.  In strict terms, this applies to the sale of goods and not supply of services.  Finance Act 2013 extends the provision to supply of service.

The obligation is on the receiver to file and pay the tax remains.  The liquidator is obliged to repay sums due under the capital goods scheme adjustment.  This is deemed a necessary disbursement out of income.

The Finance Number 2 Act 2013 confirms that receivers or mortgagees in possession are responsible for the obligations of the capital goods owner.  The mortgagee must provide the record within 60 days.  The provision is extended in the number two act.  It applies to mortgagees and receivers after 1st May 2014 but applies to receivers appointed before commencement of the finance act 2013 for the first time.

Developer Sale

The Finance Act 2018 ensures that the taxation of the sale of a residential property, by  the developer or a person connected to the developer, where the developer was entitled to deductibility, continues to apply where a receiver disposes of that property, being an asset of an accountable person