Supply of Immovable Property
A building (whether new, second hand or old building) refers to a fixed structure in the ground in the sense of the common law fixture to the land. However at EU level, buildings which can be disassembled and reassembled have been categorised as buildings, notwithstanding that they have been severed.
A supply of immovable property is a transfer in substance of the right to dispose of it, as owner or the transfer in substance of the right to dispose of them. A transfer is generally be equivalent to a conveyance of rights of ownership. There need not be a formal conveyance. There may be a conveyance in substance. For example a resting in contract situation would be regarded as a disposal at the point of payment, as the beneficial interest is clearly transferred.
Anti-avoidance legislation applies to the sale by a non-VATable entity, of land in connection with their development by way of building contract where the purchaser of property, or a person connected with the purchaser enters in agreement with a taxable person (a developer or builder to develop property) with a connected agreement for the transfer of land. That latter agreement will be VATable notwithstanding that on general principles, VAT would not otherwise apply.
The following supplies of property after 1st July 2008 are exempt from VAT. The exemption does not necessarily mean that no VAT arises on such transactions. On the contrary, there may be a claw back of VAT already claimed.
- sale or other supply of second hand buildings or property;
- sale or other supply of old buildings or property
- sale or other supply of property not developed in the last 20 years.
The sale of a house or apartment by a builder is VATable even if it takes place after the time period when it is deemed “old”, if the builder was entitled to an input credit (reclaimed VAT) on construction.
Where land or other property is sold with a connected contract for its development, there may be deemed to be a VATable supply. This arises with the commonly encountered mechanism whereby there is a sale of land coupled with a development contract. The land owner may enter a license agreement with the builder to transfer sites to his nominee. In the absence of anti-avoidance legislation the transfer of the site to the buyer might be exempt.
Sale in Course of Business
In order to be a VATable sale of property, there must be a sale in the course of furtherance of a business (as is the general requirement for a VATable supply). In this context, ”business” has a wide meaning and will exclude everything except purely private transactions.
A private non-business transaction would include the sale of a dwelling house second-hand and may include very occasional a one-off transaction. However, a person may be readily deemed to act in the course of a business, even in the case of a one-off transaction. Accordingly, transactions other than the an sale of a private residence, may be deemed to be made in the course of a business for this purpose.
There must be a sale or sale equivalent. There must be disposal of rights of ownership.
The new rules apply to properties purchased after 1st July 2008. If they were purchased before that, the old rules may have applied. Where a property is owned on 1st July 2008, and is sold after that date, transitional rules apply.
The new rules distinguish between buildings and other property. The rules applicable are broadly similar, but there are small differences. Property includes buildings and land without buildings.
Development in relation to land means construction, demolition, extension or the alteration, reconstruction of any building on land or the carrying out of any engineering or other operation in, over or under the land to adopt it for a materially altered use.
Development is interpreted accordingly. Development on a building not involving a change of use, generally means that some work has been carried out on it.
The works must be done in under or over the land. It must be developed for the purpose of a materially altered use in the case of land, as opposed to buildings. Revenue argue that land is developed, although physical works are not undertaken on it, if surrounding access and servicing land is developed.
Significant development means development that adopts or was intended to adopt the building for a material alteration, altered use or costs more than 25 percent of the sale price. It is a question of fact as to what cost has been incurred.
Normal methods of measuring and apportioning costs may be used. If the works are undertaken by a third party contractor, this may be straightforward. If they are undertaken by the land owner him or herself it may be more difficult as to what elements are to be included or to be excluded.
Prior to 2008, a 10 percent rule applied so that works below this amount in value relative to the full property value, were exempt and not regarded as development, as a rule of thumb. However this exemption no longer applies and a relatively small amount of development work may cause the property to be developed for VAT purposes.
The physical state that the property is in when completed – the degree of finishing and fitting that will have been carried out – will depend on its intended use and may vary from one type of building to another. Finishing and fitting work that is normally carried out by the person who will use the property, whether as owner or tenant, does not itself have to be completed for the property to have reached the point of being ‘completed’.
A requirement for completion in all cases is the connection of all of the utility services that will enable the property to be used for the purposes for which it was designed. The five-year rule for taxable supplies of completed property begins from the date of completion.
A building is not significantly developed if it does not (and is not intended to) adapt the building for a materially altered use, provided that the cost of such development does not exceed 25% of the consideration for the supply of the building. If the property is either materially altered or the cost exceeds 25% of the sale price in the five years prior to sale, then the property will be taxable because the development is not insignificant.
Where a person adds an additional subsidiary building to the existing building such as an additional floor or an extension, Revenue would not generally consider this to be “development of a previously completed building”. Minor development is relevant when determining whether a sale is taxable or exempt and where work has been carried out in the past 5 years on a previously completed building.
“Refurbishment” is a concept within the CGS. Whenever a person carries out a development on a previously completed building, this constitutes a “refurbishment” and the “refurbishment” is a capital good in its own right. There can be several “refurbishments” for any one property; the adjustment period for each “refurbishment” is ten intervals, the first of which begins when that refurbishment is completed. The fact that the development work may or may not have been minor is not relevant to its classification as a “refurbishment”.
Change Use Effect
Change of use from one commercial use to another is not a material alteration or use. Changes from commercial to residential are regarded as material. In determining whether a building has been materially altered it is necessary to look at what the building was capable of being used for before and after the work on the building is carried out. An indicative list of uses is
- commercial / professional
- non-business use
Whenever a development converts a building from one of the categories to another it is considered to have adapted the building for a materially altered use.
Supply of Second Hand Property and Land
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;
- have been the subject of a transfer between two unconnected persons.
The supply of used second hand property is exempt. This is property that has been completed, has not been developed since that completion and where sale takes at least 24 months following the most recent completion and where there is a previous transfer subject to VAT between connected persons.
The sale of land/non-buildings is exempt if it has not been developed within the last 20 years. This covers infrastructural works other than buildings. In this context, development has a wide meaning and may include works that facilitate the development of the property for a different use, such as the provision of services adjoining it.
Exemption and Option to Tax
The consequence of exemption is that a VAT charge by way of clawback may arise for the seller / transferor. Accordingly where a sale is undertaken by a seller who acts in the course of a business to a buyer who acts in the course of another business who can reclaim VAT partially or entirely, it will generally make sense to opt to tax the sale.
The option to tax avoids a tax charge. The terminology is not intuitive.
Although the sale is “taxed”, this means that purchaser will be in a position to recover all or part of VAT and the seller does not suffer the VAT liability arising on the clawback that that would arise by reason of the exempt supply. The capital goods scheme charge is thereby avoided.
Where there is a joint option to tax, the purchaser accounts for VAT on the sale and not the seller. The purchaser self accounts, with potentially no tax cost. See the sections on instances of self-accounting which arise in various contexts under the VAT legislation. In essence, the purchaser enters the purchase and claims a simultaneous input credit, where he entitled to do so (where and to the extent that it is used in a vatable business.
It is a matter of negotiation between the parties as to whether there should be an option to tax. Whether or not the option to tax is exercised, will depend largely on whether and too what extent the purchaser can recover VAT on input (how much of his trade is vatable).
Where all or most of the trade is vatable, the election to VAT should have not effective cost for the buyer, at least, in the short run. There may be no cash flow implication. There may be future consequences at the point of sale, similar to those which arise for the seller.
Sale of Non-Exempt Property
In the case of a sale of property which is taxable, the seller must charge, collect and remit VAT. The purchaser can reclaim VAT in the normal way.
Completion means that the property has been developed to such a state that apart from finishing and fitting work which would normally be carried out on behalf of the person who will use them, it can be effectively used for the purpose for which they were designed. Utilities and services must be connected. In the case of a house, this requires connection to services and utilities.
A property becomes a used second hand property or building if it has been occupied for 24 months since completion. Occupation means that it has been occupied and been fully in use following completion, where the use is one for which planning permission was granted and where there property is let, occupied and fully used for such ( e.g. by a tenant).