VAT Consultation

VAT Policy Section

Budget and Economic Division

Department of Finance

Government Buildings

Upper Merrion Square

Dublin 2

3 May 2007

Re: Proposed Revision to Current System of applying VAT to Property Transactions

Dear Sir

I refer to the Minister for Finance's announcement in the Budget 2007 of wider consultation in the area of proposed changes to the VAT treatment of property transactions, and the subsequent publication of Revenue's VAT on Property Review Project 2006 Final Report and corresponding legislative changes that would be necessary to make to the VAT Act to reflect the recommendations in the report.

CCAB-I has been actively involved in the special review project since its inception in May 2005. We have made comments on the initial consultation which are included in the appendix to this letter.

We wish to acknowledge this opportunity for further consultation, and in particular the chance to make this submission on the effect of the proposed changes on the members of the above four representative Accountancy Bodies.

90% Rule

As in our previous submission (reproduced in the appendix), we wish to strongly request that the ‘90% Rule'be removed from the proposed changes. The 90% Rule will bring about a very strange, and undesirable, result.

It will mean that if an IFSC company rents a property it will have to pay a far larger disallowable VAT cost when signing the lease, than if it actually buys the same property.

In the following example if the IFSC company rents the property it will have to pay a €10m irrecoverable VAT cost when signing the lease, while if it buys the same property the irrecoverable VAT cost will be only €2.2m –

• Let's assume a developer develops a property in the IFSC on which the builder and others charged him VAT of €10m.
• Let's assume a US company is seeking accommodation for its IFSC subsidiary. Assume the IFSC US subsidiary will be entitled to 80% recovery.
• If the developer lets the property to the IFSC company, because it has less than 90% recovery, the developer will lose his €10m inputs, which no doubt he will seek to recover from the US tenant.
• If the developer sells the property to the IFSC company plus VAT of say €11m, the IFSC subsidiary will recover €8.8m.
• So the irrecoverable VAT cost the IFSC company will have to pay if it rents the property will be €10m, while the irrecoverable VAT cost of buying it will be €2.2m €11m – €8.8m).

Other Proposed Changes

I would now like to address the other proposed changes under the following headings which have been used in the Revenue Report:

• Proposed New System
• Capital Goods Scheme
• Leasing and Letting of Immovable Goods
• Transitional Measures

Proposed New System

ss 3 and 4, Draft legislation

The proposed new system is described in Chapter 5 of the Revenue Report. According to paragraph 5.1, the scope of the charge to VAT will be restricted to certain supplies of “freeholds” and “freehold equivalents”. In summary, “freeholds” and “freehold equivalents” are taxable where the first supply of a new building is made within 5 years of the date of its completion; or where a second supply is made within 2 years of completion.

At first glance the proposed new system appears to simplify the VAT treatment of property transactions. However, there IS a number of ambiguous definitions in the draft legislation, while some terms are not defined at all, which make it difficult to get to grips with the actual workings of the legislation. For example, “freehold equivalent” is defined in Section 3(1) of the draft legislation as the “transfer in substance of the risks and rewards of ownership in immovable goods”. This definition is not clear on the extent of the rights being transferred which would cause the transfer to be taxable In addition, “completed” and “occupied” are not defined in detail in the draft legislation. It is our understanding, based on section4(1) of the draft legislation, that the Minister will publish regulations on the definitions of “completed” and “occupied”. It will be necessary to examine those regulations in detail before we would be in a position to comment on the practical consequences of this aspect of the proposed system.

We welcome the option to tax freeholds and freehold equivalents outside of the above rules where agreement is reached between the vendor and the purchaser, which is described in paragraph 5.3 of the Revenue Report. The key aspect of this proposal from our point of view is that the VAT will be levied on the remaining annual adjusted amount. We understand that EU approval is required for this element of the proposed new system in the form of a derogation from the Directive. While Ireland has a derogation in relation to the current system, we wish to voice our concern that a derogation as required for the proposed system goes beyond the current one. If this aspect of the proposed system cannot be implemented, we would strongly advise that the success of the proposals overall could not be guaranteed. The suggested amendments to the VAT treatment of property transactions would not be commercially worth while if such an advantageous element were not included.

On a practical level, there is a number of commercial concerns in relation to the proposed new system as it stands. The main commercial concern will be the practical difficulty in securing both purchaser and vendor approval for the option to tax.

Capital Goods Scheme

s 4B, Draft legislation

The Capital Goods Scheme, as described in Chapter 6 of the Revenue Report, is a new departure in the area of VAT on property in this jurisdiction. According to paragraph 6.2 and section 1 of the proposed text, a capital goods scheme is a mechanism for the adjustment of deductions over the life of a capital good(which by its nature would have a much longer life than goods bought as stock in trade). Such capital goods schemes were provided for in Article 20 of the EU Sixth Council Directive.

The introduction of the proposed Capital Goods Scheme, in particular the extension of the adjustment period to the maximum of 20 years and the treatment of any refurbishment of the property as a capital good in its own right (with a different adjustment period of 10 years), will result in a significant increase in the compliance obligations of all taxpayers in relation to the maintenance of accurate documentation in respect of each capital good in the property, the need to establish past events in respect of the property and the necessity to comply with annual adjustment obligations.

Such obligations would be quite onerous on the taxpayer and the Revenue alike. We would strongly urge that a de minimis threshold be introduced before the Capital Goods Scheme applies, for example the Capital Goods Scheme would only apply to properties with a market value in excess of €1,000,000.

Leasing and Letting of Immovable Goods

Definition: s 1, Draft legislation

Chapter 7 of the Revenue Report describes the proposals in relation to leaseholds. We welcome the removal of the requirement to charge VAT on the creation of long leases and thereby the removal of the categorisation of leases between short and long leases and the necessity to determine the capitalised value of certain long leases.

We understand that there is an option to tax leases on a transaction by transaction basis, provided the landlord and tenant jointly opt to tax and tenants must have “full or virtually full” recovery. We wish to make the following points on this:

• At present “full or virtually full” recovery has not been defined in legislation. It would be helpful If it could be defined in legislation rather than relying on Revenue practice which will lack clarity in an area that could result in a significant tax liability.
• If the tenant status is misrepresented, then at present it is proposed that the lessor is liable to account for the Capital Goods Scheme adjustment. We would strongly urge that the lessee be the one who must account for the adjustment, as the lessee is the person who made the misrepresentation.

Transitional Measures

s 4C, Draft legislation

The proposed new rules would apply to the supply of new property from the commencement date. There will be considerable transitions to be made for transactions which had previously being taxable and are no longer taxable (such as assignments and surrenders of leases)and property which had previously been within the VAT net and no longer are within the net (such as property developed after 1972 but outside of the 20year period).

We welcome the attempt to try to deal with all transitional arrangements. However, the legislative changes do not consider the transitional measures for freehold/freehold equivalent in the following circumstances:

• Used property last developed over 20 years prior to the proposed new rules, and
• Used property last developed within 20 years prior to proposed new rules

In the first circumstance, it is our understanding that the supply would be exempt with no capital goods scheme adjustment required; and in the second circumstance, there is a 2 year transition period in which the supply would be taxable on consideration and no capital goods scheme adjustment required, with the proposed new rules applying thereafter. It is our view that it would be crucial to legislate for the above two circumstances rather than relying on Revenue practice which would be unclear for taxpayers who find themselves in such a situation.

In addition, we suggest that Revenue should issue a statement advising that interest and penalties will not apply during the transitional period where the taxpayer has acted in good faith.

To conclude, if the sole purpose of the proposed new system is to simplify the current complex system of the VAT treatment of property, we are not convinced that this will be achieved. When completely changing from one tax system to another, there will be a number of significant practical considerations to be dealt with. These include the protection afforded by the VAT clause in the current legal agreements which will have to be reworded to deal with the new proposals, and the fact that property owners are contracting today for tomorrow's provisions. Given the importance of the property industry to Ireland's economy, we would recommend that if the current system is to be amended, the proposed new system should be confirmed at the earliest possible opportunity so as not to prejudice transactions already in the process of being completed.

The Revenue Report which was published in December 2006 refers to the Sixth Directive. As the Sixth Directive was recast with effect from 1 January2007, we would welcome a statement by the Minister confirming that the proposed new system is in accordance with new Directive 2006/112/EC.

Finally, we again wish to acknowledge the opportunity afforded to CCAB-I to take part in this consultation process. Given the importance of the property sector on the Irish economy we would like to meet with representatives of your Department and the Revenue Commissioners to discuss the proposed changes and, in particular those outlined in this submission.

Kind regards

Yours sincerely,
Marie Barr

Chairperson, CCAB-I Tax Committee

cc	Mr David Hardiman, Secretary – Indirect TALC, Revenue Commissioners
	Mr Kevin Elliott, Chairperson – Indirect TALC, CCAB-I.