# Reclaiming VAT on investment property



## Parnell (5 Mar 2006)

I paid 250000 for an investment property. My accountant tells me I should register for vat and I will get a lump sum from the Revenue of 13.5% of Purchase price. I will have to pay vat on rental income at 21% and will eventually have to repay all the lump sum back but I have substantial disposable income in the short-term. My question (a) if I register for vat will I pay vat as well as capital gains if I sell the apartment in 10 years time. (b) can I deregister for vat beforeI sell the property once I have repaid all the vat refund I got when I bought the property?


----------



## mikeyny (5 Mar 2006)

Look here to get an idea about the process and do a search to get more information


----------



## Parnell (5 Mar 2006)

Thanks,but I need to know can I deregister just before I sell so that I will not be caught for vat on the sale!


----------



## bazermc (6 Mar 2006)

Parnell

Vat on property is an extremely complex area as i am sure your accountant will tell you.  

firstly you will pay tax on your rental income at your marginal rate that could be 42% not 21% big difference!!!! if your other income is over the cut off point. secondly, you will pay capital gains tax if you sell the property at a gain at 20%. thirdly if it is a residentail property it may be very difficult to charge an extra 21% of the monthly rents as not a lot of landlords do so and lastly you cannot de register for vat before the diposal you must remain registered and charge vat at 13.5% on the disposal again this may not advantageous as second hand houses would not normally be within the vat net. so in summary i would not recommend reclaiming the vat on your investment!!!!!


----------



## ARCH (6 Mar 2006)

bazermc said:
			
		

> Parnell
> 
> lastly you cannot de register for vat before the diposal you must remain registered and charge vat at 13.5% on the disposal again this may not advantageous as second hand houses would not normally be within the vat net.
> 
> ...


----------



## Parnell (6 Mar 2006)

Thanks to both of you-as you can see it appears to be highly complex-as a matter of interest my accountant tells me I can deregister before I sell if I have repaid the vat lump some to the revenue that I originally claimed on thye purchase.
However my solicitor tells me I cannot deregister and will pay vat on the proceeds of the sale!!!!!!


----------



## Parnell (6 Mar 2006)

my solicitor and my accountant are giving me different information-one says yes you can deregister prior to selling on the property-my solicitor says the direct opposite!!-its a minefield!!


----------



## bazermc (6 Mar 2006)

i think you can deregister before the sale but you may need to re register when making the sale and charge vat but i will not be a costs to you but instead to the purchaser hence my reason for saying earlier that "it may not be commercially advantageous because other second hand sellers will not be charging vat"


----------



## ubiquitous (6 Mar 2006)

One significant downside to registering for VAT for this purpose is the possibility of future legislative changes in this area. For most investors the question of current deregistration formalities is irrelevant - what will affect them are the rules governing deregistration whenever they sell the property.

If the State can spot some way to squeeze more money out of landlords by changing some aspect of this scheme in years to come, they will be sorely tempted to do so.


----------



## Trustmeh (7 Mar 2006)

bazermc said:
			
		

> *i think you can *deregister before the sale *but you may need* to re register when making the sale and charge vat but i will not be a costs to you but instead to the purchaser hence my reason for saying earlier that "*it may not be* commercially advantageous because other second hand sellers will not be charging vat"


 
You arent going to get the answer here, only speculation and opinion.  My accountant has told me that his *interpretation* of the law is that you can deregister before the sale, once VAT due is paid. I dont think for one second I would EVER approach a solicitor for advice on this matter...mine doesnt even know what to charge for Stamp duty.

Also, bazer mentioned above 





			
				bazermc said:
			
		

> thirdly if it is a residentail property it may be very difficult to charge an extra 21% of the monthly rents as not a lot of landlords do so


 this is incorrect, you can call what you charge in rent as VAT inclusive, just make sure you declare and pay the VAT due!


----------



## bazermc (7 Mar 2006)

yes but that would leave you with a shortfall as you are paying revenue a chunck of your rental income leaving you with a cashflow problem thats why you do not get landlords of residential property recovering the vat on there investment


----------



## asdfg (7 Mar 2006)

This is how I think the it works.
I am not a tax expert so could be wrong  



> firstly you will pay tax on your rental income at your marginal rate that could be 42% not 21% big difference


You pay tax on your rental profit not income 



> that could be 42% not 21% big difference


Surely this would save you tax



> yes but that would leave you with a shortfall as you are paying revenue a chunck of your rental income leaving you with a cashflow problem thats why you do not get landlords of residential property recovering the vat on there investment


 
Effectivelly you are getting an interest free loan from revenue for the value of the VAT element

Example Vat Element of new house 54,000. You take out a loan for the amount excl VAT  
Say Annual Rental in area 12,000
You also charge 12,000 incl of VAT 
VAT element 2,083 @ 21% (not sure if this is correct rate)
Rental Income for you is 9,917 (tax will be lower)
Less expenses (interest relief will be smaller so tax will be higher) 

Remember losses can be carried forward until profit is made
You return 2,083 per annumn until the vat of 54,000 is repaid
You can also reclaim vat in respect of any work done on the house, including legal etc 
You can then deregister from VAT 
You really need to crunch the figures to see if its worthwhile. Saving could be minimal for the effort involved.  
Don't know if you can deregister prior to VAT being repaid


----------



## bazermc (7 Mar 2006)

trust me i am a tax consultant and accountant with a big 4 firm..... dont bother recovering vat on investment properties......vat on propety is extremely complex and is designed such that you will not end up making a profit from it at the expense of revenue
most second hand homes like the ones on myhome.ie do not have vat built into the price so when you charge vat at 13.5% you are automatcially at a dissadvantage.


----------



## bazermc (7 Mar 2006)

with regard to degistering before sale this is possible but you will need to reregeister in respect of the sale as the threshold for the sale of properties is nil and vat is chargeable on the sale as you received a vat refund on your acquisition


----------



## asdfg (8 Mar 2006)

> most second hand homes like the ones on myhome.ie do not have vat built into the price so when you charge vat at 13.5% you are automatcially at a dissadvantage.


 
What about claiming VAT on a new build and letting the property



> with regard to degistering before sale this is possible but you will need to reregeister in respect of the sale as the threshold for the sale of properties is nil and vat is chargeable on the sale as you received a vat refund on your acquisition


 
So whatever you receive when selling the property you have to pay VAT to revenue.


----------



## Parnell (8 Mar 2006)

asdfg said:
			
		

> This is how I think the it works.
> I am not a tax expert so could be wrong
> 
> 
> ...


 
No you cannot deregister before the vat is repaid-thanks for all the help


----------



## Ham Slicer (8 Mar 2006)

Parnell said:
			
		

> My question (a) if I register for vat will I pay vat as well as capital gains if I sell the apartment in 10 years time. (b) can I deregister for vat beforeI sell the property once I have repaid all the vat refund I got when I bought the property?



(A) When you have repaid all the VAT over say 10yrs through VAT on rent, you will then de-register for VAT.  Sale of the property may leave you liable to CGT but not VAT as you've taken the property out of the VAT net.

(B) yes

As you are no doubt aware, VAT on property is a very complex area.  You should get proper professional advice before embarking on this venture.


----------



## ARCH (8 Mar 2006)

I agree with Ham slicer and disagree with bazermc. Bazerc I think you are looking at section 4(3)(ab) and coming to the conclusion that based on this new provision introducted in the FA 2005 that you can not deregister and that you must charge VAT on the resale.
However you must read the section fully to see that the section applies to where a property was first purchased for a vatable transaction but then apportioned to a self supply.
In the case of a waiver of exemption the property was allways a nonvatable transaction where you waived an exemtion and therefore you can not apportion to a not vatable activity.

Therefore you can deregister as soon as you have repaid the vat you were orginally reclaimed. By registering you will obtain a tax advantage in that you are taxable on the net rents.


----------



## ARCH (8 Mar 2006)

Just to add you should not take tax advice from your solictor.  If you do register for VAT you should however get advice from a tax specialist as there will be implication for other rental properties you might have etc.


----------



## bazermc (8 Mar 2006)

Arch 
Section 4(3)(ab) deals with a clawback of an input credit claimed where a waiver of exemption is not in place - a lease of lease than 10 years, this section does not take the property out of the vat net a subsequent supply will still be liable to vat

It is always neccessary to go through the 4 basic questions if all answered yes than the sale is liable to vat at 13.5%. the property market is already over valued without charging an extra 13.5% on the selling price or you could sell with the expectation that you will only receive 88% of the proceeds and the balance must go to revenue. then of course stamp duty would be less as the duty is charged on the net amount so that may be attractive for the prospective buyer especially if they are ftb's

the questions are as follows:

1. Was the property developed or redeveloped in whole or in part since 31.10.1972? *YES*
2. Has the person disposing of the interest or creating the lease got an interest of 10 years or more? *YES A FREEHOLD INTEREST*
3. Is the person disposing of the interest or creating the lease doing so in the course or furtherance of any business carried on by him. This is as distinct from doing so in a private capacity. For example, selling one's residence is not a sale in the course or furtherance of business. *YES A SALE OF A INVESTMENT PROPERTY NOT HIS PRIVATE RESIDENCE*
4. Was the person who is disposing of the interest or creating the lease entitled to an input credit? *YES THE INDIVDUAL RECLAIMED THE VAT ON THE PROPERTY*

Therefore, the transaction IS chargeable to VAT. Cancelling the registration before the sale would therefore be pointless if you must charge vat on the sale


----------



## Parnell (8 Mar 2006)

Thanks for that but im none the wiser-let me put a scenario to you and then ask you for a simple *yes* or *no *answer to the question posed.
A confused man buys a house property for 100000 euro which he intends to let
Prior to buying he has read in a financial magazine that if he registers for vat he can reclaim the 13500euro.vat on the purchase price
He is aware that he will have to make a vat return every two months and that he will have to charge vat on the rental income he receives.
He is attracted by the 13500 interest free loan from the revenue-he could do with the money now!!
So he registers for vat and over the years gradually pays off *all the 13500 *,some of it through paying vat on the rental income, the balance by way of a lump sum to the revenue commissioners.
He wanted to repay it because he wanted to a vat bill of *nil.*
*He now deregisters for vat*
One year later he sells the property.

*QUESTION (*NO FUDGING PLEASE)- *Will he be liable for vat on the sale?*


----------



## ubiquitous (9 Mar 2006)

> *QUESTION *(NO FUDGING PLEASE)-....



Eek!!!!


----------



## bazermc (9 Mar 2006)

simple answer *yes* you will obliged to charge vat on the selling price but that is a cost for the buyer in the same way it was a cost for you.  you used the property for a taxable supply which means you could recover the vat cost incurred. your prsopective buyer could be doing the same thing????

fyi do not believe financial magazine especially on tax issues


----------



## ARCH (9 Mar 2006)

4. Was the person who is disposing of the interest or creating the lease entitled to an input credit? *YES THE INDIVDUAL RECLAIMED THE VAT ON THE PROPERTY*

*The answer to this question is NO.* They were not entitled to reclaim the Vat on the property as they were not making a taxable supply of the property. 

However they were entitled to waive the exemption to VAT on short letting and then get the VAT back, this is very different. They are then governed by the waiver of exemption rules, this allows deregistration and removal of the property from the VAT net.


----------



## ARCH (9 Mar 2006)

[*QUESTION (*NO FUDGING PLEASE)- *Will he be liable for vat on the sale?*[/quote]

Simple answer, provider you deregister before the sale NO you do not need to charge VAT


----------



## bazermc (9 Mar 2006)

Arch 

A short term letting with a waiver in place is a taxable supply.  As a result the owner has an entitlement to claim an input credit, without the waiver in place the letting would be an exempt letting as per the 1st Schedule VATA 72 and the consequences would be no entitlement to an input credit.  Having an entitlement to an input credit is a tax jargon way of saying you can get the vat back, in effect they are the same thing.

Here is an extract from the Irish Taxation Institute 2nd year VAT text book re. exempt lettings

*7.8.5 Other implications if waive VAT exemption*
"Where a person grants a short-term lease in a property and waives the VAT exemption in relation to short-term lettings, the property is brought into the “VAT net”. This means that a subsequent disposal of an interest in the property will be liable to VAT (subject to the Economic Value Test being passed if the subsequent disposal is by way of a long lease.) "

Deregistration to remove property from the vat net if it were possible would have every landlord in the country doing it and revenue losing out.  one of the reason for s.4 of the act being so complex is that its is full of anti-avoidance rules to prevent wise guys trying what you are suggesting


----------



## Parnell (9 Mar 2006)

Thanks Bazermc,
the answer to your question (3) will in my case be 'NO'- can I take it then that if I dispose of the property in less than 10 years and pay off all the original vat lump sum that I can then sell the property without having to pay vat on the sale,that is assuming that legislation on this issue remains as it is?


----------



## stuart (10 Mar 2006)

bazermc said:
			
		

> Deregistration to remove property from the vat net if it were possible would have every landlord in the country doing it and revenue losing out. one of the reason for s.4 of the act being so complex is that its is full of anti-avoidance rules to prevent wise guys trying what you are suggesting


 
In what what is there a loss of Vat to Revenue?

stuart@oilean.ie


----------



## bazermc (10 Mar 2006)

Parnell

your business is renting and then selling property (not your own private residence). in order to recover vat on the purchase you were in business to rent the property on and now you want to sell it you are still in business therefore i find it hard to see how the answer to your question 3 is no
unless you diverted the property to your private residence for say a few nights then sell it even then i reckon there is anti-avoidance against doing that


----------



## ARCH (11 Mar 2006)

bazermc said:
			
		

> Arch
> 
> 
> Bazerc your quote is correct, but the legislation still allows the return of the VAT and deregistration removing the property from the VAT net.
> ...


----------



## JohnGonne (12 Mar 2006)

I for one, find this a very interesting debate, having a similar professional background as the two protagonists, and also being a landlord who has already reclaimed VAT on a new build.

I do not profess to be a VAT expert, but I agree with Arch’s interpretation – an investor can reclaim the VAT on a new build, deduct VAT from the rents received on short-term lettings and this is paid to the Revenue, once the original liability is extinguished, you can de-register for VAT, and then sell the property without recourse to charging VAT.

Again, just from my reading of the changes in 2005 legislation, appears to address the issue of VAT avoidance on ‘self-supply’, that is the where a property is taken out of taxable us and made subject to VAT exempt letting. The purpose of s100 is to ensure that a ‘VATable property’ (i.e. one in which a taxable interest is held) remains in the VAT net, and to ensure that any sale of such property (the disposal of the taxable interest) is subject to VAT.

The example I would think of for this case, is  - I’m a developer, I develop a site by building a block of apartments on the site, I am liable to charge VAT on the sale of those apartments, but to artificially boost my developers profit, I retain 5 of the apartments for personal use (to let as a landlord) , and subsequently sell them 5 years on without charging VAT. By retaining the 5 apartments, I have created a ‘self-supply’ and moved the VATable property into a VAT exempt letting position, thus avoiding the VAT obligations on my development. 

However, for an investor, I am being charged VAT on the supply of the property by the developer  - this is an arms length transaction. VAT is declared by the developer on the sale. However the property is always a non-vatable transaction from the investor, and cannot be apportioned to a vatable activity. If I choose to reclaim the VAT, and repay as above, provided I de-register prior to sale, VAT is not charged on the ultimate sale.

I would temper this that legislation surrounding this is liable to change, and as this model provides both  an Income Tax (tax declared on rents net of VAT) and cashflow advantage, I could see the revenue commissioners possibly introducing an interest charge on the initial reclaim to negate the advantage. I can also see if the scheme is subject to abuse i.e. I buy property A, reclaim VAT, use as deposit on property B, reclaim VAT on property B, use as deposit on property C, and so on, then the scheme could be likely to significant change due to the loss of tax revenues.

If a person elects to reclaim VAT on a new build, they will have to charge VAT on all lettings (new and second-hand, whether or not they reclaimed VAT on all of them) if they have other properties.

Finally, I will add, I am not a VAT expert, this is just my reading of this, and you should seek professional from a reputable tax consultant prior to any decisions. VAT on property is highly complex, and other parties may give you different interpretations of the legislation

_
Unreadable font/font size corrected by RainyDay_


----------



## Parnell (12 Mar 2006)

Thanks John, your contribution makes a lot of sense- thanks to all who wrote to this topic- I am a wiser man- time will tell if by registering for vat i am to become a wealthier man!!!


----------



## JohnGonne (13 Mar 2006)

Thanks for that, Parnell – I would just add that what the Revenue Commissioners are trying to achieve is a lockdown on VAT avoidance schemes. If BazerC’s interpretation is correct (and I’m not saying that it is incorrect), then the VAT on the property could potentially double i.e. 
- developer pays VAT on sale,
- purchase reclaims the VAT,
- purchase then repays VAT from rents received, and /or lump sum payment,
- purchaser then de-registers
- (as per Bazer) purchaser re-registers for VAT and charges / deducts VAT from ultimate sale of property

This methodology would then appear to be anti-competitive, as it is a penalising effect on the taxpayer and would be open to challenge in the European Court, if successful, would probably have the effect of opening the door for court claims against the Revenue Commissioners. This is not without precedent – to my recollection, there have been two major ‘rowbacks’ on tax treatment in the last year a) Inland Revenue v MARKS & SPENCERS re use of losses within a group company structure, and b) VAT on Canteens within companies, in which I believe the Revenue Commissioners have already altered their treatment of same.

Again,just my opinion, not an authorative view. I agree, thanks to all parties, who wrote on this topic


----------



## bazermc (14 Mar 2006)

Arch

FYI i am AITI and ACCA for some 20 years now and a tax director, i do however find the institutes book v helpfull, sometimes it is neccessary to go back to basics

I had a good read of section 7 VATA and did not come to the same conclusion as you, i could not find any wording relating to cancelling a registration and avoiding vat on the subsequent disposal. perhaps you could point out which subsection it is in.....i am using the 2005 fa edition

i therefore had to go back to section 4 to come to my conclusion

my understanding is: given the indirect nature of the vat system vat must be charged on the sale of freehold in the above circumstance, why? because otherwise vat on the particular property would never be recovered by the exchequer. i.e when the property was built and vat costs incurred and recovered by the builder the builder then charged on vat to the buyer and again vat was recovered by the landlord now the landlord did not charge vat on subsequent disposal based on your conclusion the property is now leaving the vat net and the government missed thair cut of tax receipts and of story.


----------



## Ham Slicer (14 Mar 2006)

bazermc said:
			
		

> .... and the government missed thair cut of tax receipts and of story.



They don't.  What about the VAT repaid on the rents?


----------



## JohnGonne (14 Mar 2006)

_given the indirect nature of the vat system vat must be charged on the sale of freehold in the above circumstance, why? because otherwise vat on the particular property would never be recovered by the exchequer. i.e when the property was built and vat costs incurred and recovered by the builder the builder then charged on vat to the buyer and again vat was recovered by the landlord now the landlord did not charge vat on subsequent disposal based on your conclusion the property is now leaving the vat net and the government missed thair cut of tax receipts and of story._


Transaction 1 - Builder pays VAT of €27,000 on a new build house of €227,000

Government VAT receipts = €27,000

Transaction 2 – Investor waives exemption to VAT and reclaims €27,000 on his new investment property worth €227,000

Government VAT receipts = - €27,000, nett position now nil

Transaction 3 – Investor deducts VAT on rents received at 21%, and pays a lump sum payment giving a total of €27,000 of VAT repaid to government

Government VAT receipts = €27,000 (same as transaction 1)

Investor now de-registers for VAT

There is no loss of tax receipts.


----------



## ARCH (14 Mar 2006)

THe Revenue got there VAT on the RENTS and if this does not equal the VAT orginally reclaimed then the balance of the VAT orgially reclaimed must be returned prior to deregisration.


----------



## JohnGonne (14 Mar 2006)

_ My reply - Transaction 3 – Investor deducts VAT on rents received at 21%, and pays a lump sum payment giving a total of €27,000 of VAT repaid to government_

_Government VAT receipts = €27,000 (same as transaction 1)_

_ Your question - THe Revenue got there VAT on the RENTS and if this does not equal the VAT orginally reclaimed then the balance of the VAT orgially reclaimed must be returned prior to deregisration.
_ 

That's exactly what I said in my reply!


----------



## ARCH (15 Mar 2006)

John,

I was replying to earlier post I did not see your post as you posted at about the same time as I.


----------



## Archie (22 Mar 2006)

What is the cost for CGT purposes where VAT was reclaimed on the initial purchase of a property?   

Many thanks

A


----------

