Revenue Note for Guidance

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Revenue Note for Guidance

96. Waiver of exemption under old rules

Summary

This section deals with old and transitional measures in relation to exempt lettings of properties. Under the old waiver rules in place up to 1 July 2008, a trader engaging in the exempt letting of property could opt to become accountable for tax on the rent by waiving his/her right to exemption in accordance with regulations. When a person waived the right to exemption, the standard rate of VAT applied to the letting.

Transitional measures for short-term lettings of immovable goods, where a waiver of exemption applied, are also dealt with. The waiver of exemption rules with regard to short-term lettings and the cancellation rules in respect of such waivers continue to apply to any lettings in place before and on 1 July 2008 except where it is a letting between connected parties.

This section provides that a waiver will not apply to connected lettings with effect from 1 July 2008 unless the VAT on the annual rent exceeds a certain minimum level. It also limits the possibility for taxpayers to use the period before 1 July 2008 to create new avoidance scheme for transitional properties. If a landlord and connected tenant formed a VAT group since July 2008, or formed a VAT group after the passing of the Finance (No. 2) Act 2008, an immediate VAT liability to the waiver cancellation amount is triggered.

Details

(1) The letting of immovable goods is an exempt activity in accordance with paragraph 11 of Schedule 1. The right to waive that exemption was provided for in section 7(1) of the Value-Added Tax Act 1972.

(2) A waiver under the old rules ceases to have effect at the end of the taxable period in which it is cancelled.

(3) Where a taxpayer cancels a waiver, he/she has to repay any net VAT refund received by him/her in relation to the taxable lettings covered by the waiver. The taxpayer is required to repay the difference between any tax accounted for on the rents and any tax refunded to him/her in connection with the lettings . This covers:

  • (3)(a) The amount deducted as input credits.
  • (3)(b) Any deductibility claimed prior to waiving in respect of the acquisition or development of the property that is subsequently let on a short-term basis must be included in the cancellation adjustment.
  • (3)(c) Also, the cancellation clawback operates even where a property was acquired—
  • as part of a VAT-free transfer of a business under section 20(2)(c), or
  • (3)(d) as part of a zero-rated supply to a trader authorised in accordance with paragraph 7(7) of Schedule 2.

This subsection thus ensures the same treatment on cancellation regardless of how the taxpayer acquired the property

(4) Where a person has waived his/her right to the exemption, he/she is liable for tax on the rents as if the letting was not specified in Schedule 1. This means the person making the waiver is liable at the standard rate.

(5) In the case of a person who cancelled his or her waiver of exemption prior to 1 July 2008, the adjustment period for any capital good included in the waiver cancellation sum is treated as ending on the date of that cancellation. This ensures that in those circumstances the person will not be required to make any adjustments under the Capital Goods Scheme (CGS) for those capital goods. In practical terms, it relieves the taxpayer of any obligations under the scheme but also ensures there will be no unjustified entitlement to VAT credit.

(6) Transitional measures cover landlords who have a waiver in place before and on 1 July 2008.

(7) In the case of a person who cancelled his or her waiver of exemption prior to 1 July 2008, the adjustment period for any capital good included in the waiver cancellation sum is treated as ending on the date that a person cancels his or her waiver of exemption.

This ensures that the person in question has no further obligations under the CGS for those capital goods. It also ensures that no unjustified entitlement to credit will arise after the waiver is cancelled.

(8) Subsection (8) deals with lettings between connected parties. Under the old rules a waiver applies to all short-term lettings of property. This subsection provides that a waiver ceases to apply with effect from 1 July 2008 to any letting between connected persons in respect of which a landlord’s option to tax would not be allowed (viz. where the letting is between connected persons and the lessee is not carrying on a mainly (90%) taxable business).

  • (8)(a) An amount calculated on the basis of the waiver cancellation amount in respect of that individual property is payable.
  • (8)(b) If that waiver covers other lettings also, the amount paid under this subsection is disregarded for the purposes of calculating the cancellation amount when that other waiver comes to be cancelled.

(9)(a) There is an exception to the requirement that waivers must be cancelled when the landlord and tenant are connected when the VAT on the rents reaches a minimum amount and other conditions apply. If the tax accounted for on a letting between connected persons is not less than the amount calculated in accordance with the formula in subsection (10), then, the waiver may continue to apply to that letting.

(9)(b) If the lease changes or if the amount paid in rent falls short, then the waiver is cancelled.

(9)(c) The continuation of a waiver as outlined above applies to a letting of a property in respect of which the landlord had a waiver in place on 18 February 2008 and—

  • that letting was still in place on 1 July 2008, or
  • on 18 February 2008 the landlord owned the property in question and was in the course of developing that property on that date.

(10) It also applies to a letting of a property in respect of which the landlord holds a long lease (but not a freehold equivalent interest), and that long lease was acquired from an unconnected party between 18 February 2008 and 30 June 2008.

(10) Subsection (10) contains the formula for calculating the minimum amount of tax payable on a letting between connected persons for the purposes of allowing a waiver to continue to apply.

Example:

X acquires a property in 2002 for €750,000. VAT @ 13.5% charged on the acquisition = €101,250. Exemption is waived. That amount of VAT is deducted by X. Property is let to a connected person. VAT charged on rents up to 1 July 2008 = €48,000.

In the formula, A = €101,250, B = €48,000 and Y (number of full years since the first letting) = 5. (A – B)/(12 – 5) = €7,609

€7,609 is the minimum VAT payment in respect of the rent that must be made for the next 12 months in order to keep the waiver alive. (The idea here is that the VAT on the rents must at least equal the VAT deducted on the acquisition or development of the property.)

(11) There is provision for the immediate cancellation of any waiver of exemption that was in place before 1 July 2008 where a landlord enters a group on or after 1 July 2008 and lets the property to a person in the group.

(12) Subsection (12) deals with transactions that take place after 3 June 2009.

It defines ‘relevant immovable goods’ as goods that the landlord has to take into account in calculating the clawback under the old rules. It provides that the waiver of exemption is automatically cancelled when a person no longer has any property to which the waiver applies.

Where a person owned a property that was subject to the waiver of exemption on 1 July 2008 (when the new rules for VAT on property came into effect) but no longer had properties which are subject to the waiver, the waiver was automatically cancelled on the date of passing of the Finance Act 2009 (i.e. 3 June 2009), and the person had to pay the waiver cancellation sum. (Since 1 July 2008 it has not been possible to extend a waiver to any new property.)

Relevant Date: Finance Act 2019