VAT Property Transitional
2008 & Transitional Sale
The pre-July 2008 rules on VAT, insofar as they applied to leases was radically to those which have applied since that date. Special transitional rules apply to leases, where the relevant interest was acquired before 1 July 2008. Because the post July 2008 rules “look back” up to 20 years, there are many situations in which the transitional rules will continue to be relevant.
A transitional interest is one acquired before 1 July 2008. Where lease predates 1 July 2008, it is a legacy lease and the transitional rules apply to its assignment after 1 July 2008. The transitional rules apply to transitional transactions.
A transitional sale is one where
- the property was acquired or developed before 1 July 2008,
- it was a completed property,
- where the vendor was not entitled to deduct any VAT on the acquisition or development and
- the property has not been significantly developed since that date.
In this case, the vendor is entitled to treat the sale as exempt with an option to tax.
Transitional Rules
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.
A transitional lease arises where a landlord who has a transitional interest (see above) is granting a lease. He must have been entitled to deduct VAT on developing or acquiring the property. He must not have made a waiver in relation to the letting. In this case, lease / letting is exempt, with an option to tax.
A transitional assignment is an assignment of a legacy lease (granted pre July 2008). It must have been less than 20 years since the grant or most recent assignment of the lease (prior to July 2008). If the tenant was entitled to recover VAT on acquiring or developing the lessee’s interest, the assignment is subject to VAT.
A formula applies to calculation of VAT. If the tenant was not entitled to recover VAT on acquiring or developing the property, it is exempt. However, the parties may opt jointly to tax the assignment.
The property must have been owned by the relevant person on 1 July 2008 and he must have acquired or developed it prior to that date. The transitional rule apply until sale. It applies to freehold interests and long leases equivalent to freeholds. The rules apply until the legacy lease ends or is surrendered.
Option to Tax
Where there is a transitional sale, the parties may elect jointly to opt to tax. The sale is subject to VAT and purchaser self-accounts for VAT arising. Under the Capital Goods Scheme, a seller who may not have had VAT recoverability, might be entitled to VAT repayment in respect of the balance of the lease period in that case.
An option to tax must be made by the middle of the month following the sale to the Revenue. It should be provided for in the sale contract, if it is to apply.
A person who is not entitled to VAT recovery on a purchase before 1 July 2008 does not have to charge VAT. This reflects the principle of the older legislation which determined the obligation to charge VAT with reference to whether there was an original entitlement to reclaim VAT on the acquisition or development.
Adjustment
The new rules, in contrast to the older rules, focus on whether there is a new, old or second hand building. Under the pre-July 2008 rules, a letting for a term of less than 10 years of a property for which VAT was recovered, could be the subject of a adjustment similar to that under the capital goods rule. The amount of VAT was proportionate to the length of the underlying lease to a maximum of 20.
The above principle continues in respect of a transitional property. Accordingly, on a sale which is exempt, where VAT was previously reclaimed, the VAT is recovered proportionate to the period remaining in the lease, up to a maximum of 20 years. The position is similar to, but not identical to that under the Capital Goods Scheme. The amount payable may differ.
The option to tax applicable under the transitional rules, does not allow additional retrospective VAT recovery of VAT, which was originally irrecoverable. It is the new rules only, that may allow an element of VAT recoverability retrospectively, where an entity which could not recover VAT but later sells to an entity which can charge VAT, and there is an option to tax.
Assignment & Surrender
A sale after a deductibility adjustment has taken place may lead to partial recovery of VAT. If however there is a subsequent taxable letting, there is no recovery of VAT paid on the deductibility adjustment occasion. The deductibility adjustment is not recoverable.
The assignment or surrender will be at the transitional assignment or surrender, if it is within 20 years from the later of the creation of the lease or the most recent pre-July 2008, assignment. If it is later than this, the transitional rules do not apply at all.
The assignment or surrender is subject to VAT, if the tenant is entitled to recover all or any VAT charged on the acquisition of the lease or on the development of the property. If there was no entitlement whatsoever, the assignment or surrender is exempt.
Option to Tax
In the above case, both the parties could agree to opt to tax. In this case, VAT is chargeable on the assignment or surrender. The may be VAT reclaim due to the assignor, in part. The general provisions applicable to option to tax, applies. The amount of VAT arising on an exempt assignment or surrender, is the proportion of the original acquisition or development expenditure represented by remaining years in the adjustment period and as a proportion of the total number of years in that period.
VAT recovered by the assignor in developing does not form part of this equation. The adjustment period is the lesser of 20 years and the number of years in the lease when granted in the case of an assignment by the ordinary landlord. In the case of assignees, it is the lesser of 20 years or the number of years remaining on assignment.
Premiums or reverse premiums paid on surrender or assignment are ignored. The sums to which VAT applies are those determined by the formulas. If the assignment of surrender is exempt, the parties may opt by to tax joint assessment.
The legacy lease is a capital good for the tenant. That tenant who assigns and surrenders a transitional lease where VAT is charged on such assignment or surrender may be entitled to recover some of the VAT which it was unable to recover on acquisition. This is represented by the proportion of the lease term remaining at the time of assignment or surrender.
The reverse charge obliges the acquiring party (assignee or landlord) to account for VAT. The reverse charge applies to most assignments and surrenders of transitional interests.
The position of the assignee or a landlord on surrender depends on whether it is the first or later post July 2008 assignment or surrender. The adjustment period is the number of remaining lease period plus one. In the case of second and subsequent assignments, the adjustment period is the number of intervals remaining for the assignor plus one.
Where a property is surrendered, it remains a capital good in the hands of the landlord in the amount of VAT arising by reason of the surrender. It appears that this supersedes the capital goods arising from the original purchase.
Adjustment in Period
Where the landlord sells or disposes of property within the adjustment period in taxable disposal, the landlord may recover the VAT arising on the surrender. He may be able to recover VAT he did not recover on the occasion of a surrender by way of an adjustment similar to that above.
If the disposal is exempt, he may have to repay VAT by way of a Capital Goods Scheme adjustment. This applies only to sales within the adjustment period.
Where property is a transitional interest which has been surrendered to the landlord, the new letting will be exempt. In the usual way, this will give rise to a VAT charge unless the option to tax is exercised. The new lease is not a legacy lease.
Where property is used after a surrender, it appears on balance, that the landlord must carry out an annual adjustments for the adjustment period after the legacy lease is surrendered.
Tenant Refurbishment
The tenant may have created a capital good by way of refurbishment expenditure. He may ask the assignee or landlord to take this over, so as to avoid a claw back. If the assignee or landlord takes over the capital good created by the refurbishment and uses it for an exempt purpose, there would be a VAT claw back on relative to the acquisition of the interest, of the VAT recovered by the assignor and the refurbishment works.
Where the assignee takes over refurbishment expenditure from a tenant, the adjustment period appears to runs from the date of completion of the work. Accordingly, the assignee must make annual adjustments if applicable, in relation to VAT recovered on the original acquisition of the transitional interest.
Where the tenant refurbishes the property after commencement of the new rules, the Capital Goods Scheme applies to the refurbishment.
Various Issues
A person who owned a transitional interest on 1 July 2008 does not need to make annual adjustments, unless the property is refurbished after that date. In this case, refurbishments would have to be made in respect of VAT incurred. If the property was let, a deductibility adjustment might arise.
Where there is a change in use of property after 23rd February 2010 or where the property is first used after the date, then it is necessary to monitor for large variations in the recovery rate. Certain consequences follow, where there is a 50% change in the amount of recovery.
The Capital Goods Scheme adjustment period in the case of a leasehold may be 20 years or less. If the lease had less than the number of years to run when acquired, this determines the length of the period. The adjustment period commences when the lessee’s interest in the lease is acquired.
If the interest was acquired before 1 July 2008, the adjustment period is the lesser of 20 years or if less, the number of years left to run on the lease. In the case of first assignment after that date, the relevant number of years is the number of years left in the adjustment period for the tenant who assigns the lease, plus one. Similar principles apply to a surrender. In the case of subsequent assignments, the period is the number of periods for the assignor party plus one.
Where a property has been let on a long lease and has not been developed by or on behalf of the landlord or for his benefit since it was let, then a subsequent sale of the freehold subject to the lease is exempt.
Finance Act 2011 provides that where a public body makes a supply of residential property acquired prior to July 2010, a proportion of the acquisition VAT is recoverable under the capital goods scheme.