Revenue Tax Briefing

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Revenue Tax Briefing Issue 32, June 1998

Supreme Court Decision in the case of Erin Executor & Trustee Co.

Background

In a judgement in the above case delivered on 16 December 1997 the Supreme Court held that a landlord was entitled to deduct VAT on post-letting expenses incurred in relation to a property which had been the subject of a taxable supply for VAT purposes. A possible consequence of the judgement was that further supplies of the property were also liable to VAT. It had been Revenue’s opinion prior to the judgement that when a landlord made a taxable supply of propertyhe/she was not entitled to input credit on post-letting expenses and further supplies of the property were not liable to VAT.

Following an intensive examination of the judgement we now set out the position as regards the claiming of VAT on post-letting expenses and the charging of VAT on subsequent supplies of property for transactions arising prior to 27 March 1998 and transactions arising after that date.

Position prior to 27 March 1998

In accordance with the Supreme Court judgement VAT on post-letting expenses incurred by the landlord following a taxable supply of an interest in the property may now be deducted. Landlords who acquired property with sitting tenants by way of a purchase of the freehold interest would also be entitled to claim VAT on qualifying post-letting expenses. Deductible expenses would include costs relating to rent reviews and collection, maintenance of the property and general overheads such as accountancy and office expenses. The expenses must be related to a taxable disposal of property. It is important to draw a distinction between the supply of the landlords interest in the property e.g. the sale of the freehold with sitting tenants which is not a supply for VAT purposes, and a subsequent supply of the property e.g. the grant of further long lease when the first lease is finished. As stated above the grant of such a further long lease became taxable as a result of the Supreme Court decision. As regards further supplies of a property Revenue have decided that they will not treat supplies of such property before 27 March 1998 as taxable provided a landlord does not seek to claim VAT on expenses incurred in connection with such supplies. (However see below with regard to the position applying after 27 March 1998).

New VAT leaflet on Property

A detailed Information Leaflet No. 3 VAT on Property [Claims for repayment arising out of the judgement in the case of Erin Executor and Trustee Company Limited, for periods prior to 27 March 1998] which explains the position with examples is available from local tax offices or from the Revenue Forms & Leaflets Service at 01 - 8780100.

Position after 27 March 1998

The Finance Act 1998 made a number of changes to Section 4 of the VAT Act 1972 to reflect and qualify the effects of the judgement. These changes have effect from 27 March 1998.