Gaining refund of VAT on investment property

[ubiquitous]

I don't think anyone has ever denied that there are advantages to voluntary VAT registration for property rental. However the disadvantages remain.

The most obvious is the uncertainty surrounding a possible VAT charge arising on the disposal of the property post-deregistration. Some very eminent tax professionals would dispute your opinion that de-registering from VAT before the property is sold will remove the possibility of a VAT charge. I'm not a VAT expert so I cannot say whether they are right or wrong but the lack of consensus on the issue and the notorious complexity of VAT legislation would worry me.

Even if these tax experts are correct, there is another worrying possibility - that a future legislative change could impose a mandatory VAT charge on the disposal of a property where that property has been brought into the VAT net by an election by a/the previous owner to VAT-register in respect of rents.

Another issue is the risk of a serious VAT hit if de-registration is botched and/or if the property is inadvertently sold or otherwise disposed of without the appropriate deregistration formalities being completed.

 

[liteweight]

This is not necessarily the case-if you sell the property while it is still capitalised then you must return VAT from the sale. Easy solution is to voluntarily de-register before the sale, repay the amount of VAT refund that is still out standing and then the sale can proceed as per standard property sales.

Agreed.

As for the charging of VAT on rents, it works like this.
Rent charged to Tenants is say 1000. Which under the VAT scheme isn actually 826 plus VAT @21%. So you repay your VAT refund this way. Its only a loan and has to be paid back. The up side is that any profit you make from rental is reduced by 21%, and therefore you have less profit reckonable for income tax. So you are also getting a tax break on thrading income-why bother with Sec 23 when you can go this way?

Agreed at the moment. Having read the proposal mentioned above, it's not clear whether the profit will be reduced for some if this comes into affect. Granted, I browsed through it late at night so I might not have a complete handle on it yet. It seems to me that what is proposed is: those who have waived exemption and are operating on a small scale will (a) be given the opportunity to deregister by 2008 having paid what's due or (b) agree to pay Revenue an annual amount over 20 years until the refund is cleared.

Now, if one chooses (a) then fine, no more VAT on rental and no income tax reduction. If one chooses (b) however, is the amount paid to Rev. still considered VAT and therefore deductible from income, or is it considered a loan repayment?

It also appears (bear in mind I only glanced at the document in the early hours) that unless the tenant has the ability to reclaim VAT, then the landlord has no option but to opt out of the system.

Any thoughts welcome!

 

[liteweight]

Some very eminent tax professionals would dispute your opinion that de-registering from VAT before the property is sold will remove the possibility of a VAT charge. I'm not a VAT expert so I cannot say whether they are right or wrong but the lack of consensus on the issue and the notorious complexity of VAT legislation would worry me.

Yes, it is the lack of consensus which worries me too. The VAT office have assured me that there is no liability once you've deregistered and paid whatever is due.

- that a future legislative change could impose a mandatory VAT charge on the disposal of a property where that property has been brought into the VAT net by an election by a/the previous owner to VAT-register in respect of rents.

There's the rub! It's always a possibility that the rules will change. It's happened before. VAT legislation in this country was never put together in a full and complete manner. It's basically cobbled together with changes made whenever the need arises. This makes it particularly difficult to understand and it's often left open to interpretation IMO. Reading the link provided by yankinlk above, it appears to me that most small investors won't be given an option. They have to de-register whether it takes 2 or 20 years.

Another issue is the risk of a serious VAT hit if de-registration is botched and/or if the property is inadvertently sold or otherwise disposed of without the appropriate deregistration formalities being completed.

Another bug bear of mine. What if I died suddenly and my children inherit? No one seems to be able to tell me the implications with regard to VAT on my properties. For example, is the ability to deregister lost due to my demise?

Although the whole process is very simple IMHO, there are a lot more issues to be considered than simply registering and deregistering. One has to keep one's eye on the ball to see what forthcoming events Rev. may have in mind!

 

[San Martino]

Hi Folks,

As I understand it (although I am not certain) there also a risk that when you sell the property, the base cost will be treated as the net of vat price and you will end up paying more CGT (assuming prices have gone up) than would otherwise be the case?

San Martino

 

[Newby]

This is not as simple as it sounds at first glance. Stages (i) to (iii) are the easy parts. The difficulties arise after that.

Many experienced tax advisors (myself included) are very sceptical of the long-term benefits of voluntary VAT registration for landlords. It certainly does not suit everyone - many eminent advisors believe that it does not suit anyone unless they have a sufficiently large portfolio of properties to allow them engage professional advice from (expensive) VAT specialists on a continuous basis over many years. If things end up going wrong, there is potential for them to go horribly wrong. Remember, the VAT system is primarily a tax-collection mechanism for the State. It was certainly never designed as a subsidy scheme for property investors.

That is why I am especially sceptical of so-called advisors who aggressively promote voluntary VAT registration to customers and whose fee structures are such that they have vested interest in convincing as many people as possible to VAT-register their properties, regardless of their circumstances.

Firmly with you on all of the above. In addition, as tax is self-assessment it is up to the taxpayer to understand what they are doing. Some tax advisors are not even comfortable with all the ins and outs of VAT.

Incidentally the Revenue have indicated their approach to this type of scheme [broken link removed].

 

[Newby]

Originally Posted by Luternau http://www.askaboutmoney.com/showthread.php?p=362421#post362421
This is not necessarily the case-if you sell the property while it is still capitalised then you must return VAT from the sale. Easy solution is to voluntarily de-register before the sale, repay the amount of VAT refund that is still out standing and then the sale can proceed as per standard property sales.


Agreed.

Not sure I do. It depends when the property was first let and the waiver of exemption was made. If the letting was made after 1 May 2005, Revenue feel that "When the property is ultimately sold, the consideration will be liable to VAT".

 

[liteweight]

Not sure I do. It depends when the property was first let and the waiver of exemption was made. If the letting was made after 1 May 2005, Revenue feel that "When the property is ultimately sold, the consideration will be liable to VAT".

Do you have a link for this Newby. I particularly asked Rev. about this point and they told me that this was not the case if one has deregistered before the sale. The attachment posted by yanklink doesn't make any mention of this either.

Although we registered ourselves, we did take advice from a tax consultant and our accountant. Neither mentioned a deadline of May 2005.

 

[liteweight]

Hi Folks,

As I understand it (although I am not certain) there also a risk that when you sell the property, the base cost will be treated as the net of vat price and you will end up paying more CGT (assuming prices have gone up) than would otherwise be the case?

San Martino

Again I was assured that this was not the case if one deregistered before sale. As I said in another post, vat laws are made more complicated by additions and subtractions over the years. Because of this I'm open to hearing that my consultant's take on the issues aren't necessarily everyone elses interpretation!

 

[Newby]

Do you have a link for this Newby. I particularly asked Rev. about this point and they told me that this was not the case if one has deregistered before the sale. The attachment posted by yanklink doesn't make any mention of this either.

Although we registered ourselves, we did take advice from a tax consultant and our accountant. Neither mentioned a deadline of May 2005.

Yup i attached it in the earlier post. [broken link removed] it is again. Its taken from a Tax Briefing which is a publication that Revenue aims at tax practitioners. The idea is to give everyone an idea as to Revenue's opinion on certain items. The relevant section is [FONT=sans-serif, Aldine]VAT Treatment of sales of short-let properties[/FONT].

I'd be interested to hear if you got anything firmer from Revenue (such as something in writing) - i'm pretty surprised that the VAT office confirmed that.

 

[Arch2]

"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. "

Newby, I believe you are wrong. This legislations refers to the situation where was entitled to deduct VAT on acquistion / Development. In the case of Residential property short leases there is no entitlement to reclaim VAT hence the need to use a waiver. What the legislation refers to is a situation where a builder is building property with the intention of sale, therefore is entitled to VAT reclaim and then decides to short let a propety waives exemption, deregisters and sell on the property.

Eg Builder builds property for 113,500 VAT reclaimed 13,500
Shortlets, Waives exemption, cancel waiver
Sells property for 200,000 if this rule did not apply he would only pay VAT of 13,500. Hence reason for the rule.
But it only applies where you were entitled to reclaim the VAT on purchase/construction. So when joe public buy resendial property he is not entitled to reclaim the VAT he must waive exemption.

It is a suttle point, but that why some us can make a living from tax.

 

[liteweight]

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.

To me, this means that anyone who deregisters is no longer in the vat net. Deregistering entails paying back the amount of VAT rebate received less any amounts already paid over to Rev. by way of VAT on rental.

Oops! Post crossed with Arch!

 

[Arch2]

I agree and I have also confirmed this with Revenue.

 

[liteweight]

I agree and I have also confirmed this with Revenue.

Phew! Thanks for that, I'd envisaged a night of trying to understand Revenue Law!!

 

[Newby]

That is indeed why there are tax advisors.

However, I cannot agree with you. If you buy a newly built property and rent it out then sell it without being registering for VAT then there are no VAT implications. You paid your VAT on the apartment at the start and that's the end of it.

If however you want to claim back (Joe Public or othrwise) the VAT on the acquisition you have to make the supply of the residential property taxable. To do this you need to make a further taxable supply and register for VAT. The further taxable supply would be the waiving of the exemption of a short term letting.

The fact that you have waived your exemption and are registered for VAT means that you are "entitled to recover" the VAT on acquisition. If you were not entitled to recover the VAT then you would not be entitled to reclaim the VAT on acquisition from Revenue. The whole point of the waiver is to make you entitled to claim the VAT back on acquisition and charge VAT on rental income.

If you reclaimed back the VAT despite not being entitled to it, it would be a fraudulent return.

If you were entitled to reclaim VAT then the property comes within the VAT net and you are then looking at the date on which the waiver was made and whether or not the canceling of a waiver brings the property back out of the VAT net.

Could you please point me to the place in the legislation where it specifically only includes builders or excludes joe public from this.

Needless to say this is all about interpretations of the VAT law and is subjective. VAT on property is a disaster and very complex but i wouldn't be recommending this to anyone.

 

[Newby]

I agree and I have also confirmed this with Revenue.

Having it confirmed by Revenue is good and reading it in conjuction with the article does give some comfort. I still don't think the legislation reads that way.

And Revenue can also change their mind on their opinion too. Keep an ear to the ground.

 

[Arch2]

Hi Newby
Please see this part of the document you posted.

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.

Also read

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.

This is my point as to the difference between builders who were entitled to reclaim vat, did so, then waived exemption, cancelled and sold

compared to Joe public, who start with waiver, does not have apply to reclaim without the waiver.

Hence the difference..

 

[Newby]

Hey Arch, I can see your points but you won't sell it to me!

The document I posted is a Tax Briefing (effectively Revenue's opinion on how something operates) but it is not the legislation. Having a Revenue opinion on something and getting them to confirm it is always welcome (seeing as how they operate the legislation) but it is not the same as having it written in the legislation. The exclusions of the property being out of the VAT net is Revenue's current opinion on how the VAT legislation should operate. Opinions, however, can and do change.

Plus all VAT law is subject to any decisions that come from the Euro Court of Justice. A decision there may impact on Revenue's current opinion.

 

[Arch2]

Newby,

Off course things can change and will change when the finance act is passed as the waiver will no longer be possible for residential property.

The waiver has existed for over 20 years, it will be scraped for sure and revenue have but forward there plan for scrapping and it is not that unfavourable if the draft plan is enacted.

 

[liteweight]

The waiver will definitely be scrapped. I think there is even a reference to the many 'consultants' who have sprung up, advertising the waiver as an interest free loan. It's a shame in a way because for those who wanted to genuinely become investors/landlords in the property market, it freed capital so that a substantial portfolio could be built up. I find it slightly irritating that Revenue were prepared to let it ride, as long as it was only known by the 'inner circle' but, now that the 'guy in the street' knows about it.... there's a rush to cancel!

 

[extopia]

Easy solution is to voluntarily de-register before the sale, repay the amount of VAT refund that is still out standing and then the sale can proceed as per standard property sales.

So why bother then? There are easier ways to get a de-facto loan.