Revenue Note for Guidance

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Revenue Note for Guidance

97. Option to tax letting of immovable goods

Summary

This section provides an option to landlords to tax lettings of commercial properties. It specifies the circumstances under which the landlord can opt to tax the rents under rules effective from 1 July 2008. Opting to tax the rent enables a landlord to claim deductibility on his or her purchase or development of the property. If the tenant is in a taxable business, the tenant can deduct the VAT on the rent. The option to tax is not allowed where the landlord and tenant are connected parties and the tenant has less than 90% deductibility. There is no option for a landlord to tax a new residential letting.

Note that the option to tax is letting specific – in other words, the landlord can opt, or not opt, to tax each letting. This contrasts with the waiver of exemption system available for short-term lettings under the old (pre- 1 July 2008) rules. Also, the new system does not distinguish between short-term lettings and leases for over 10 years.

Details

(1)(a) Tax is chargeable on rents (at the standard rate of VAT) where the landlord opts to tax the letting. Where the option is exercised, the landlord is an accountable person in respect of the letting and is liable to account for the VAT on the rents and the letting is not an exempt letting.

(1)(b) A person who is entitled to deduct the VAT incurred on the acquisition or development of a property, on the basis that the letting of that property will be taxed, will be treated as having exercised the landlord’s option to tax and that option will remain in place until neither of the conditions in paragraph (c) apply. In other words, if the landlord claims VAT deductibility on the building, architectural costs, etc., he or she is deemed to have exercised an option to tax.

(1)(c) A landlord’s option to tax is exercised —

(i) by including a provision for the taxation of the rents in the letting agreement, or

(ii) by the landlord notifying the tenant that the rent is taxable.

(1)(d) A landlord’s option to tax is terminated by —

(i) making an exempt letting of the property, after claiming deductibility for the input VAT,

(ii) making a new agreement in writing with the tenant that the letting is no longer taxable or giving the tenant a notification to that effect. The termination cannot be earlier than the date of the agreement to terminate the option or the date notification of the termination is received by the tenant.

It is also terminated if—

(iii) the landlord and tenant become connected persons,

(iv) the landlord or a person connected to the landlord occupies the property (including by way of a sublease), or

(v) the property is used for residential purposes.

Example:

X develops a building in 2010, which is to be let to commercial tenants. He/she registers for VAT on the basis that he will make taxable lettings. He/she claims a repayment in respect of the VAT charged by the builder, etc.

When the building is let, X includes a provision in the agreement that the rents will be taxable. He/she charges VAT on the rents and accounts to Revenue for the tax. (If circumstances change and VAT is not charged on the rents, there is a CGS adjustment and X must repay the VAT that he/she deducted.)

(2)(a) A landlord may not opt to tax a letting where that landlord or a person connected to that landlord occupies the property by way of letting or otherwise. This includes subleases – for example, A lets to B (not connected); B sublets to C, who is connected with A. This ends the option to tax and there is a CGS clawback.

(2)(b)(i) However, the connected persons rule does not apply (i.e. the option to tax applies) where the tenant is entitled to at least 90% deductibility for the rents.

(2)(b)(ii) If the landlord exercises the option to tax in this case, the connected persons ban reapplies where the tenant’s deductibility falls below 90%.

(2)(c)(i) Similarly, the connected persons “subletting” rule does not apply (i.e. the option to tax applies) where the tenant is entitled to at least 90% deductibility for the rents.

(2)(c)(ii) If the landlord exercises the option to tax in this case, the connected persons ban reapplies where the tenant’s deductibility falls below 90%.

(3) Subsection (3) defines connected persons for the purposes of this section. Briefly, the concept of connectedness is defined in terms of relatives (individuals) and in terms of control and commonality of interests.

(4) A landlord may not opt to tax lettings of residential properties. (A similar rule existed under the old waiver of exemption system in place pre- 1 July 2008.)

(5) If there is an existing option to tax and the property is then used for residential purposes, the option ceases to have effect.

Relevant Date: Finance Act 2019