VAT Treatment of sales of short-let properties

Properties to which article refers

This article deals with the VAT treatment of properties where the owner has a taxable interest ¹ and was entitled to deduct VAT incurred on the acquisition and/or development of the property and where the property was subject to an exempt short-term letting. The fact that the owner was entitled to deduct VAT on the acquisition and/or development of the property brings the property within the VAT net.

This article refers only to properties that are within the VAT net; it does not refer to properties in respect of which there was never an entitlement to deductibility e.g. a property which was purchased for short-term letting ² where there was no waiver of exemption in place ³.

Properties that were first subject to an exempt short-term letting on or after 1 May 2005

Section 4(3)(aa) VAT Act, 1972 , which was introduced by Section 100 FA, 2005, applies to properties where the owner first surrendered possession of the property by way of exempt short-term letting on or after 1 May 2005.

It provides for a claw-back of part of the VAT previously claimed as deductible. This is referred to as a deductibility adjustment. The adjustment is payable on the occasion of the first exempt short-term letting of the property entered into by the landlord.

When the property is ultimately sold, the consideration will be liable to VAT and the seller will be entitled to deduct a proportion of the VAT which was clawed back when the property was first used for VAT exempt short-term letting. Details of the new provision are contained in the Notes For Guidance on Finance Act, 2005 available on the Revenue website http://www.revenue.ie/en/practitioner/tax-briefing/archive/64/ under the heading ‘Revenue Law’.

Properties that were first subject to an exempt short-term letting before 1 May 2005

The new provision (Section 4(3)(aa) VAT Act, 1972) does not apply where the property was first used for exempt short-term letting prior to 1 May 2005.

The surrender of possession of such properties by way of VAT exempt short-term letting gave rise to a charge to VAT in accordance with Section 4(3)(a) VAT Act, 1972. The charge is based on the cost, exclusive of VAT, to the person making the short-term letting, of the property (Sections 4(3)(a), 3(1)(f) and 10(4) VAT Act, 1972). In practice, Revenue deals with this by clawing back the VAT deducted by the owner on the acquisition and/or development of the property.

VAT Status of properties that were subject to an exempt short-term letting before 1 May 2005

Revenue has in the past accepted that properties in respect of which VAT had been charged in accordance with Section 4(3)(a) had passed out of the business area. This meant that tax was not charged on a subsequent disposal of the interest in the property of the person who made the short term letting, unless that person had taken a credit or deduction for any tax charged or had incurred further expenditure on development in relation to which a tax credit or deduction could be claimed.

Example 1

A chemist decided to retire from business in 1996 and short-term let his business premises. The short-term letting gave rise to a charge to VAT as a self-supply in accordance with Section 4(3)(a) VAT Act, 1972. The property remained in short-term letting and was sold in 2006. No charge to VAT arises on the sale of the property.

However, cases have come to light in which properties that were claimed to have been short-term let and to have passed out of the VAT net, on the basis that tax was chargeable as a self supply in accordance with Section 4(3)(a), had clearly remained as stock in trade of a fully taxable business. Revenue considers that the further supply of such properties is correctly chargeable to VAT. Examples of such cases are the short-term letting of a building site or a partly constructed building to an associated company of a developer during the construction stage or the short-term letting of fully constructed student accommodation units while the units were being sold to investors.

Revenue will continue with the existing practice of regarding properties, such as in Example 1, which had been transferred from use in a taxable activity to exempt or private use prior to 1 May 2005, as having passed out of the VAT net, except in the circumstances mentioned in the preceding paragraph.

Example 2

A property developer partially developed a site in 2004 and ‘let’ it to his building company, while that company was building houses on the site. He did not waive exemption on the ‘rents’ from the letting of the site. Once the building work was completed the building company handed him back the site and he sold the finished houses to members of the public. The sale of the finished houses is subject to VAT notwithstanding the ‘letting’ to the building company. (Note: The example is used simply to illustrate cases that can arise and is without prejudice as to the actual treatment of any such transaction for VAT purposes)

Waiver of exemption

Where a landlord who had waived exemption in respect of short-term lettings cancelled the waiver and paid the cancellation amount (see footnote ³) Revenue had in the past regarded that property as having passed out of the business area. The property was in effect treated in the same fashion as properties that had been short-term let without a waiver of exemption. The VAT status of such properties will, in future, be as outlined in the previous section, i.e., save in the exceptional circumstances outlined they will continue to be regarded as having passed out of the business area and VAT will not be charged on a subsequent disposal of the property. The date of surrender of possession, whether before or from 1 May 2006, is not relevant in these circumstances.

Example 3

The circumstances are as outlined in Example 1 but in this instance the retired chemist waived exemption from VAT. Prior to sale of the premises, he cancelled the waiver of exemption and paid the adjustment amount. No VAT arises on the sale of the premises.

Example 4

The circumstances are as outlined in Example 2 but in this instance the developer waived exemption on the ‘rents’. Prior to sale of the houses, the developer cancelled the waiver of exemption. However, the sale of the finished houses is subject to VAT, as the houses had remained as stock in trade of a fully taxable business.

Queries regarding this article

Any questions regarding this article can be addressed to

Brian Shanahan,
Indirect Taxes Division

Email: bshanaha@revenue.ie

Telephone (01) 6748233, or

Telephone (01) 7024112

Queries on specific cases should be referred to the taxpayer’s Revenue Office.