The special VAT provisions on leases and lettings do not apply to long leases at nominal rents, which are largely equivalent to freeholds. Their grant is treated as being in the nature of a sale, as is appropriate to their economic substance. Other leases and lettings are subject to the Capital Goods Scheme.
Leases and letting are interchangeable terms and there is no distinction for VAT purposes. A lease commonly refers to a written letting for a term which relates the relationship of landlord and tenant, typically for many years, which creates as substantial interest in the land. A letting commonly refers to a verbal arrangement creating the relationship of landlord and tenant. The terms are used interchangeably below, and a letting also refers to a lease.
If a letting is exempt from VAT, VAT need not be charged on the rent. Correspondingly, in accordance with general principles, VAT may not be recovered on acquisition development and the ongoing maintenance of the premises concerned.
It is possible to elect commercial lettings into VAT. It was formerly possible to elect residential lettings under the older VAT rules. This possibility was removed in 2007 and is not available to under the new VAT rules at all.
Lettings Post 1st July 2008
Lettings made after 1st July 2008 under the revised VAT system, may be subject to standard rules, waiver of exemption or transitional rules. There is little difference between the standard and transitional rules. The standard rules apply to lettings, where the property which has been acquired since 1st July 2008, which were first developed after 1st July 2008 or where a lease of the property is acquired with less than 10 years to run before 1st July 2008, without a current waiver of exemption.
The transitional rules apply to properties purchased before 1st July 2008, without a waiver of exemption or where a legacy lease was acquired before 1st July 2008, without a waiver of exemption. The waiver rules apply to property purchased before 1st July 2008, with a waiver of exemption in place., property developed before that date with a waiver of exemption and certain transitional property. It also applies where a leasehold interest in the property was acquired prior to 1st July 2008 with a waiver of exemption in place.
Standard Rules and Election
Under standard rules, a letting is exempt from VAT. VAT is not charged on the rent. This is the general principle. A landlord and tenant may waive exemption, in which case the lease or letting becomes taxable. The option to tax the letting requires that VAT is charged on the rent at the standard rate 23 percent.
If the option to tax (charge VAT) is exercised, VAT is recoverable on the acquisition development and maintenance of the property. Previously recovered VAT is not repayable. If no election to VAT is made, VAT previously recovered may be repayable under the Capital Goods Scheme.
The transitional rules are broadly similar. The principal difference is that under the translational rules, VAT is repayable, rather than recovered under the Capital Goods Scheme. It arises under a deductibility adjustment.
Effect of Waiver
It is not possible to recover VAT retrospectively, even if an option to tax is made, if there was no entitlement to VAT recovery when the property was obtained.
The waiver of exemption may be cancelled. In this case, it applies to cancel exemptions within the scope of the waiver. If this occurs, there is no longer an obligation to charge VAT on lettings. However, a sum must be paid to the Revenue, equal to the difference between the VAT recovered on acquiring and developing the property and VAT paid on the rents (if applicable).
As with a sale, an exempt letting will have implications under the Capital Goods Scheme and lead to a possible claw back of VAT reclaimed.
The general rules do not apply to
- most categories of holiday and hotel accommodation;
- hiring and parking accommodation for vehicles;
- letting of machinery or business installations let separately from property;
- hire of safes facilities;
- providing facilities for sporting activities of certain categories.
Landlord Option to Tax
A landlord may opt to charge VAT on rents from a letting. A landlord who does so is entitled to deduct VAT incurred on the acquisition or development of the property or on the portion of the property to which the option relates. Unlike the old waiver of exemption rules, the option to tax applies to a specific letting. The landlord has the right to opt (or not to opt) in relation to each letting.
The option to tax does not apply to a letting of residential property, or letting between connected parties. A landlord can exercise an option to tax a letting or terminate an existing option to tax a letting at any time. Doing either has implications under the capital goods scheme
The option to tax may be undertaken by way of a clause in the relevant lease or a notice confirming that the VAT is chargeable. In the absence of a clause, the landlord may be liable to account for VAT from the rents received. There is no provision which automatically shifts liability for VAT to the tenant, notwithstanding that the tenant may easily reclaim the same, if it is business tenancy. This must be provided contractually.
The option to tax, in the case of lettings, is the landlord’s privilege. The tenant may not agree as a commercial matter, to accept the option, in which event there may be no contract and/or lease.
The landlord may exercise the option under the lease. However, there must be a VAT charging clause, if he is to recover the VAT from the tenant. Otherwise, he will need to finance the VAT himself. The lease may give the option to the landlord, to charge the tenant rent.
An option to tax may not be made on lettings to connected parties when the tenant is not entitled to recover more less than 90 percent of the VAT charged. It may not be exercised, where the landlord, even though not connected, occupies the property or is connected to the entity occupying the property and the occupant cannot recover at least 90 percent of the VAT chargeable.
The primary purpose of this anti-avoidance legislation is to prevent entities without VAT recovery from engineering recovery through connected entities. Connected in this context includes connection between relations, in-laws, corporates under common control, groups and overlapping partners.
Where the landlord occupies or becomes connected with a person who occupies the property, the option is terminated if the tenant is not entitled to at least 90 percent deduction in relation to VAT paid on rents. (by Revenue concession).
The option can be deemed terminated if the tenant recovery on VAT falls below the 90 percent at any time. The option is deemed to cease at the end of the first accounting year, after which this occurs in respect of the tenant’s business.
The option may be applied
- if the tenant or occupier’s VAT recovery increases to 90 percent or more;
- if the tenants ceases to be connected;
- if a connected person ceases to occupy the property or
- the connected tenant or occupants becomes entitled to at least 90 percent recovery.
In these cases, the options tax may arise.
A practical difficulty in that the landlord has no necessary means of ascertaining the turnover of the tenant.
Transitional rules apply to the supply of properties that were taxable under the old rules and which are supplied on or after 1 July 2008. The rules for such properties mirror the new rules above, i.e. the two and five-year rules apply. However, where the seller was not entitled to deduct any of the VAT incurred in relation to the property, the supply is not taxable but the seller and buyer may opt to apply VAT to the supply.
There are special rules that apply to certain leasehold interests, which are assigned or surrendered on or after 1 July 2008. These are leases for a period of 10 years or more, but not freehold equivalents. Under the old rules the VAT charged on the creation of these leases was based on the capitalised value of the lease.
Where an assignment or surrender of such a leasehold interest occurs on or after 1 July 2008, it is subject to VAT, unless the person making the assignment or surrender was not entitled to deduct any of the VAT incurred in relation to the lease but in this latter case the parties may opt to apply VAT to the assignment or surrender. The taxable amount is calculated by reference to VAT charged on the creation or previous assignment of the lease and the number of years remaining in the “VAT-life” of the lease.
The CGS rules for dealing with changes in the use of a property during the “VATnl ife” of the property do not apply to freehold or leasehold properties that are subject to the transitional arrangements. This means that no adjustment is required if the taxable use of a transitional property (or a transitional leasehold interest in property) changes from one year to the next1
Where the sale of a transitional freehold occurs or the assignment or surrender of a transitional leasehold interest occurs, the CGS rules as outlined above apply. (Claw-back of some VAT if supply exempt, VAT credit if taxable and not entitled to full deductibility.)
There are also rules to deal with transitional properties that were rented prior to 1 July 2008 where the landlord has a waiver of exemption in place. The existing waiver of exemption may continue in place for the majority of these properties on or after 1 July 2008. The waiver of exemption may also be cancelled under the old rules. If an exempt letting of a transitional property occurs after 1 July 2008 special cancellation rules that apply in respect of waivers of exemption in the case of lettings between connected parties.
Pre-2008 Waiver of Exemption
The waiver of exemption was an option under the pre-July 2008 regime. A letting of less than 10 years was automatically exempt. By way of exception, a landlord could choose to charge VAT on all of his lettings. There was corresponding recovery of acquisition, development and maintenance expenses.
The position may be neutral relative to a tenant in a commercial property, in that the a VAT charge is largely a cash flow issue. It may be significantly less costly than the claw back suffered by a landlord in the absence of an election to VAT.
Waivers applied to all lettings of property. Where a letting is covered by the waiver and VAT must be charged at 23 percent on the lease rents. Correspondingly VAT is recoverable on the acquisition, development and maintenance costs Unlike the position with the options tax post-July 2008, the waiver applied to all lettings by the landlord .
Cancellation of Waiver
The waiver may be cancelled in which event VAT paid and VAT recovered must be assessed. The difference is payable to the Revenue, if the amount recovered exceeds the amount paid on the rents. A waiver may also terminate if there is a letting between connected persons where the tenant is not entitled to at least 90 percent recovery of VAT, the landlord or a connected party occupies the property and the occupant are not entitled to 90 percent recovery of VAT.
In this case, the landlord must pay any difference between the VAT recovered and VAT charged on the rents. In this case, the waiver is [cancelled] only in respect of the connected letting and not generally. where the property concerned is sold and the sale of subject of VAT the amount of VAT charged in the sale may be included in the calculations.
Where a property was subject to a waiver as of commencement to Finance Act, 2009– is sold and the person retains no interest in the property subject with the waiver, it has been cancelled and the above obligations to repay VAT may arise.
This applies in addition to the general rules of whether or not sales is exempt and whether or not the Capital Goods Scheme adjustment may arise for the seller.
If exemption has been claimed and cancelled and the cancellation sum has been paid, the subsequent exempt letting does not give rise to a deductibility adjustment. This is to avoid double taxation.