Example:

X ltd. purchases a property on 13 September 2010. Cost = €10million + VAT €1.35million. This is the “total tax incurred”. X deducts all the VAT. The “base tax amount” is this figure divided by the number of intervals = €1.35million /20 = €67,500.

Initial interval ends 12 September 2011. In the initial interval, property was used for 80% taxable use. An adjustment is needed. The “total reviewed deductible amount” is €1.35m × 80% = €1.08million.

A = €1.35million. B = €1.08million. Formula A – B = €270,000. This is the amount payable to Revenue for the taxable period immediately after the end of the initial interval.

(3) Under the CGS, additional VAT is either payable or deductible depending on whether or not the taxable business use increases or decreases compared with the first year. Obligations in respect of the second and subsequent intervals are set out in subsection (3). The adjustment is based on 1/20th of the initial VAT deducted.

Any change in the business use of a property during each year of the life of a property when compared with the initial business use during the first year following acquisition is required to be adjusted for on an annual basis.

Example (following on from above figures):

Suppose the proportion of deductible use changes from 80% to 70% in interval 6. The “interval deductible amount” is the base tax amount multiplied by this proportion = €67,500 × 70% = €47,250

The “reference deduction amount” is the figure for the total reviewed deductible amount (= B) divided by the number of intervals. €1.08million/ 20 = €54,000.

C = €54,000. D = €47,250. Formula C – D = €6,750. This is tax due that is payable to Revenue for the taxable period immediately after the end of the sixth interval.

(4) There are special rules – known as the “big swing” rules – to deal with significant percentage changes in business use. Where there is a change in taxable business use of more than 50% in any year when compared with the initial 12 months, an adjustment is required based on the full amount, not one-twentieth as is normally the case. When this happens, the benchmark figures have to be rebalanced.

Example:

Z ltd. buys a property for €3m plus VAT €405,000 (“total tax incurred”). The “base tax amount” is €405,000/ 20 = €20,250. Z. ltd deducts 30% of the VAT.

The “total reviewed deductible amount” is €405,000 × 30% = €121,500. The “reference deduction amount” is €121,500 /20 = €6,075.

The initial interval proportion of deductible use = 30%; no adjustment needed. 5 years later, Z’s business changes and the “proportion of deductible use” increases to 90%. This triggers a big swing adjustment because the change is more than 50%. The “interval deductible amount” = €20,250 × 90% = €18,225.

C = €6,075. D = €18,225. N = number of intervals remaining plus 1 = 16. Formula C – D × N = - €194,400. As D is greater than C, Z ltd is given a VAT credit of €194,400 in the taxable period following the end of the interval.

The benchmark figures are also adjusted, as the “initial interval proportion of deductible use” is changed from 30% to 90%. (The total tax and base tax figures do not change).

(5) Special rules are needed for dealing with letting of properties, to reflect the fact that the letting of property is exempt from VAT, but that an option is allowed in certain circumstances whereby a landlord can opt to charge VAT on the rents. Where the landlord exercises an option on a letting of a property that had previously been exempt, he/she is given a credit for the residual VAT. Where a landlord terminates an option to tax, there is a clawback of residual VAT.

Where a landlord terminates this option (paragraph (a)) or exercises this option (paragraph (b)) in accordance with the rules in section 97, an immediate adjustment of the VAT deductibility is triggered.

(6) Sales of capital goods are dealt with in subsection (6). If the person selling the property was entitled to deduct input VAT on the acquisition or development costs and the property is sold into an exempt use (“an exempt sale”), there is a VAT clawback. If the person selling the property did not get full deductibility for the VAT on the acquisition or development costs and the property is sold into a taxable use (“a taxable sale”), there is a VAT credit.

The key concepts are:

• if the sale is taxable, the capital good is treated as being used for taxable purposes by the seller and he/she gets a credit (i.e. an increase in deductible VAT).
• if the sale is exempt, the capital good is treated as being used for exempt purposes by the seller and he/she must pay additional VAT (i.e. there is a clawback).

The same rules apply to transfers of “new” capital goods under the transfer of business provisions. (See subsection (10)(c) for transfer of business rules for “old” capital goods.)

(6)(a) Where:

the sale is taxable (or would be taxable, if the transfer of business rules didn’t apply), and the seller (owner) was not entitled to deduct all of the original VAT charged, then the owner gets a proportionate credit based on the non-deductible input VAT and the number of intervals (years) remaining in the VAT life of the property.

(6)(b) Where:

the sale is exempt, and the seller (owner) was entitled to deduct some/all of the original VAT charged, then the owner must pay a clawback amount based on the VAT he/she deducted and the number of intervals (years) remaining in the VAT life of the property.

(6)(c) Where part of a capital good is transferred under the transfer of business rules, then total tax, deductible amount, etc. are all adjusted fairly for the rest of the VAT life of the property.

(7) If a tenant has a leasehold interest in a property and carries out development work on a property, he/she creates a capital good and is the capital goods owner in respect of that refurbishment. The adjustment period is 10 years.

(7)(a) Where a tenant, who is a capital goods owner in respect of a refurbishment of a property, assigns or surrenders a lease during the 10-year period that applies to such refurbishments, there is a clawback of VAT deducted.

The claw-back is based on the number of years remaining in the VAT life and is calculated using the rules in subsection (6)(b).

(7)(b) There is, however, a relieving provision for this rule. Where the tenant

• was entitled to deduct all of the VAT incurred on the refurbishment, and
• enters into a written agreement with the person to whom the lease is being assigned or surrendered,

then that person can “take-over” the obligations under the scheme and there is no claw-back required from the tenant.

(7)(c) Where an agreement under subsection (7)(b) is in place, the person to whom the lease is being surrendered/assigned takes over all the obligations in respect of the capital good.

(7)(d) If the refurbishment is destroyed by the tenant, then no claw-back arises.

(8) Subsection (8) is an anti-avoidance provision that applies to sales of complete properties between connected persons. Essentially, the provision works by comparing the VAT deducted on the acquisition of a property with the VAT being charged on its sale. Where the VAT being charged is less than the VAT that was deducted, there is a clawback of the difference between the two amounts from the person making the supply. This ensures that the VAT deducted is protected and that connected persons cannot use the provisions of the section to gain an unjustified advantage.

Subsection (8A) is an anti-avoidance provision that applies to sales of incomplete properties between connected persons. Essentially, the provision works by comparing the VAT deducted on the acquisition of a property with the VAT being charged on its sale. Where the VAT being charged is less than the VAT that was deducted, there is a clawback of the difference between the two amounts from the person making the supply. This ensures that the VAT deducted is protected and that connected persons cannot use the provisions of the section to gain an unjustified advantage.

(9) The anti-avoidance rule in subsection (8) does not apply in certain circumstances. Under the subsection (8) “disposal test”, the clawback is payable by the person making the supply. Under subsection (9), the clawback will not apply if the seller and the purchaser agree in writing that the purchaser will take on the CGS liabilities in relation to the property. The purchaser ‘steps into the shoes’ of the seller accepting responsibility for all CGS obligations of the seller. No VAT is chargeable on the supply and no new CGS life begins at the time of the supply.

(10)(a) The VAT-free acquisition of a capital good under the section 20(2)(c) (transfer of business) rules or under the section 56 (zero-rating scheme for qualifying businesses) rules cannot be exploited by an entity that would not be entitled to full VAT deductibility.

(10)(b) In these cases, the capital goods owner is deemed to have claimed a deduction of the tax that would have been chargeable.

Where an owner transfers a capital good under the transfer of business rules in the “new” period and the recipient (transferee) does not have full deductibility, then the transferee is deemed to have been charged the VAT that would have applied (if it was not a transfer of business scenario). The transferee must pay an amount to Revenue equal to the difference between

• the amount of VAT that would have applied, as above, and
• the amount that he/she would have been able to deduct (but for the transfer of business scenario).

(10)(c), (d) A situation may arise where a property is transferred as part of a transfer of a business as a going concern in circumstances where the supply of the property would be exempt from VAT if sold at that time – in other words, a transfer of business outside the “new” period.

In this case, the transferee becomes the successor to the transferor and “takes over” the liabilities of the property under the scheme. In other words, he or she steps into the transferor’s shoes and inherits the adjustment period of the property. The transferor is obliged to pass on certain information for this purpose.

(11) If a capital good is destroyed, there are no further obligations under the scheme.

(12) An owner must create and maintain a “capital good record” in respect of each capital good. This record will be used by Revenue in audit situations and also must be passed on in certain circumstances when the obligations under the scheme are being passed on from one person to another.

(12A)a Paragraph (a) contains definitions;

(12A)(b),(ba),(c) Paragraphs (b), (ba) and (c) provide that where a receiver is appointed or a mortgagee takes possession of a capital good, the obligations of the capital good owner are transferred to the receiver or mortgagee for the duration of the receivership or possession. These obligations include maintaining the capital good record, calculating any adjustment in deductibility as a result of a change of use of the capital good and remitting any tax due as a result of that adjustment. Where an adjustment under the capital goods scheme results in an increase in deductibility, the receiver or mortgagee will get the benefit of that increase;

(12A)(d),(e) Paragraphs (d) and (e) provide that where the receivership or possession ends without disposal of the capital good (i.e. it reverts back to the owner), the obligations under the capital goods scheme revert back to the owner;

(12A)(f) Paragraph (f) provides for apportionment of liability arising from a capital goods scheme adjustment where the receivership or possession commences or ends (or both) during a capital goods scheme interval;

(12A)(g) Paragraph (g) provides for apportionment of an entitlement to an increase in deductibility as a result of a capital goods scheme adjustment where the receivership or possession commences or ends (or both) during a capital goods scheme interval;

(12A)(h) Paragraph (h) provides that where the obligations of the capital good owner are transferred to a receiver or mortgagee those obligations shall also transfer to any subsequent receiver appointed or mortgagee who takes possession of the good.

(13) The Revenue Commissioners may make regulations for this section. (See Regulation 18 of the VAT Regulations 2010).