1. Conor Kennedy Law Library, Four Courts Dublin 7.

2.  CB Richard Ellis ◦ Year 2008 ◦ Property deals €500million ◦ Comparison to 2007 - €1.9 billion ◦ 2009 - €500 to €750 million ? ◦ Specific performance ◦ Forfeited deposits

3.  Definitions  Practical Examples ◦ Standard transactions ◦ Capital good scheme ◦ Leases ◦ Transitional properties ◦ Capital Gains Tax issues

4.  S.1 VATA 1972 ◦ A “taxable person carries out any business in the State ◦ ‘business’ means an economic activity, whatever the purpose or results of that activity, … for the purposes of obtaining income therefrom on a continuing basis; ◦ freehold equivalent interest”- means an interest in immovable goods other than a freehold interest the transfer of which constitutes a supply of goods in accordance with section 3. ◦ Capital goods are defined as developed immoveable goods

5.  Developed ◦ Construction, demolition, extension alteration or reconstruction ◦ Carrying out any engineering or other operation on land to adapt for materially altered use ◦ Significant development  In excess of 25% of sales price ◦ Materially Altered Use  Cusack v Minister for Local Government [unreported, High Court, 4 th November 1980]  Change from solicitor’s office to dental surgery

6.  S.2 VATA 1972  VAT shall be charged levied and paid on the supply of goods and services effected within the State for consideration by taxable persons acting as such other than in the course of furtherance of an exempt activity  S.3(1)(a) VATA 1972  The acquisition of the property is a supply of goods and includes the transfer by agreement of ownership of the goods  S.3[1C] VATA 1972  The supply of immoveable property includes the transfer in substance of the right to dispose of property, whether as the owner or otherwise. It also includes any transaction where the owner of the property becomes entitled to receive 50% or more of the value of the property at any time prior to the transaction and up to five years after the date of the transaction  S.5 VATA 1972  Any business activity which is not a supply of goods is a supply of services.

7.  S.8 VATA 1972 ◦ A taxable person who engages in the supply, within the State, of taxable goods or services shall be an accountable person and shall be accountable for and liable to pay the tax charged in respect of such supply.  S.12 VATA 1972 In computing the amount of tax payable by him in respect of a taxable period, an accountable person may, insofar as the goods and services are used by him for the purposes of his taxable supplies or of any of the qualifying activities, deduct, subject to making any adjustments required in accordance with section 12D — the tax charged to him during the period by other accountable persons by means of invoices, prepared in the manner prescribed by regulations, in respect of supplies of goods or services to him,

8. Example 1  Ms Fit – Gym operator  Acquires a new constructed two storey building on 1 st September 2008  Price - €5 million plus VAT of €675,000  Entire property used as a gymnasium  Her year end is 31 December 2008.

9. Everything is taxable unless specifically exempt  Is the property exempt ?  The property must not have been developed  If already completed, must not be further developed within 5 yrs prior to the current supply  If sold to an unconnected party & thereafter occupied in aggregate for a continuous 24 mths  5 yr old building which has had no significant development or not materially altered  5 yr old building sold to an unconnected party & thereafter occupied for a continuous 24 mths and has had no significant development or not materially altered

10. ◦ What is completed? the development of the property has reached the state where the property can effectively be used for the purposes for which it was designed ◦ What is occupied? when the property is fully in use and planning permission for the development of the goods had been granted and where the property is occupied and fully in such use by the tenant

11. Example 1  Ms Fit has purchased a new building that has not been previously occupied  Property is subject to VAT @ 13.5%.  VAT incurred on the acquisition is deductible in accordance with section 12.

12. ◦ Capital Goods Scheme as a mechanism for regulating deductibility over the “VAT-life” of a capital good. Steps to be taken – Continuing entitlement  Review of the entitlement to VAT after 1 st 12mths  If the proportion of taxable use in 1 st 12 mths (‘initial interval’) differs from the proportion of the VAT claimed - adjustment is required.  Too much has been deducted, the taxpayer must pay back the excess.  Too little has been initially deducted, claim the deficiency as an input credit.  Quantified VAT entitlement for the first twelve months is the benchmark figure

13. ◦ Annual review of the vatable use of the property ◦ Any change in the proportional tax use compared with the use during the initial 12 mths - an adjustment required ◦ Annual adjustment is difference in the initial 12 mths and the use in the year under review. ◦ VAT-life of the building is 10 years for refurbishment and 20 years in relation to new 

14. Example 1 ◦ Deducts all VAT of €675,000 in Sept/Oct’08 VAT return ◦ Reviews entitlement on an annual basis. ◦ Theoretically only entitled to claim €33,750 (€675,000 /20) per annum for the next 20 years. ◦ Initial interval ends on 31 August 2009. ◦ 2nd interval - 4 mths at 31 December 2009 ◦ For the third and sbqt intervals ends on 31 st December. ◦ The last interval will end 31 st December 2027.

15.  Amount of VAT charged on acquisition or development  Amount of the VAT deducted initially.  The date on which the adjustment period begins  No. of intervals in the adjustment period. (10 or 20)  Initial Interval % of deductible use, (% in 1 st 12 mths)  Total reviewed deductible amount,(total tax by % of taxable use for the initial interval.)  % of deductible use for each interval,  Details of any adjustments under the scheme.  Details of any sale of the property.

16. Example 2  Ms Fit Retires 1 st May 2018  Has 2 offers ◦ Property developer ◦ Firm of accountants  No significant development work  Offer - €10 million

17.  Property Developer ◦ Redevelop  Accountants ◦ 50% for its practice ◦ 50% for financial services wing

18.  Property is nearly 10 yrs old  No significant development & not materially altered  We can stop here !!!  Academically ◦ No relationship connection in original transaction & property occupied for more 24 mths in aggregate  Property Exempt  Great  But what about the Capital Goods Scheme?

19.  VAT life = 20yrs  Held for= 10yrs  Therefore partial clawback of initial VAT deducted  Formula B x N T WhereB = Total Reviewed Deductible Amt N = No. of full yrs remaining + 1 T = Total no. of intervals in adj period

20. Example 2 B = Totl Revd Deductible Amt= €675,000 N = No. of full yrs remaining + 1= 9 + 1 T = Total of intervals in adj period= 20 €675,000 x (9 + 1)=€337,500 20

21. Example 2  Avoid clawback – Sell to Property Developer  Therefore joint option to tax sale  Vat charged on €10 million = €1,350,000  Developer also self accounts for VAT – Reverse charge  Developer’s initial interval = 1 st May 2018

22. Example 2  Sell to accountants  Don’t opt to tax sale  Clawback of VAT  Accountants increase sale price to compensate  Additional proceeds - €375,000  CGT issues though  Accountants save €337,500 ((€1,350,000/2) - €337,500))

23. Sale of Old building  Ms Fit retires 1 st May 2014  Property owned for 5 yrs & 9mths  Sells property to a philanthropist  Consideration €10 million

24. Example 3  Property is an old property ◦ Property has been developed ◦ However over 5 yrs old ◦ No further development ◦ Occupied for aggregate 24 mths (not really relevant) ◦ Option to tax not available  Philanthropist is not a taxable person

25. Example 3 B = Totl Revwd Deductible Amt= €675,000 N = No. of full yrs remaining + 1= 13 + 1 T = Total of intervals in adj period= 20 €675,000 x (13 + 1)=€472,500 20

26. Sale of ‘New Building’  Ms Fit suffering from ill health  Sells building and retires - 1 st December 2012  Property owned for 4 yrs & 3 mths  Purchaser - philanthropist  Consideration €10 million  Due to ill health property only occupied for 18 mths

27. Example 3B  Property is still a “new” property ◦ The property has been developed ◦ Developed within 5 yr period ◦ No further development ◦ Not occupied for aggregate 24 mths (really relevant)  Property liable to VAT  Consider lease first then sell

28.  Property sold On 1 st May 2029  Property not developed since acquisition  20 yr old property  Property sale not taxable  No Capital Goods Scheme adjustment

29.  Ms Fit retires from business – 1 st May 2014  Property now over 5 yrs old  Leases to Health club franchisee  Period of lease = 20 yrs

30. Example 5  No distinction between long & short leases  Leasing of property is exempt  However option to tax  Option to tax exercised ◦ Insert in contract or ◦ Notifying tenant in writing

31. Example 5  Option to tax terminated ◦ Failing to notifying tenant ◦ Agreeing with tenant ◦ If landlord & tenant become connected  Except for tenants with 90% VAT recoverability ◦ Used for residential purposes ◦ Notifying tenant in writing

32. Example 6  Ms Fit – Gym operator  Acquires a new constructed two storey building on 1 st September 2008  Price - €5 million plus VAT of €675,000  Uses 70% of property as a gymnasium  Lets 30% to a physiotherapist  Does not opt to tax rent  Her year end is 31 December 2008.

33. 1 st 12 mths Total tax incurred=€675,000 Total revwd ded amt (70%)=€472,500 Refund to Revenue=€202,500 2 nd & Subseq intervals Total tax incurred=€675,000 Base tax amt (€675K/20)=€ 33,750 Ref ded (€472,500/20)=€ 23,625 Int ded amt (ditto)=€ 23,625 Adjustment= Nil

34. Example 6B  Physio’s practice expands  Ms Fit grants new lease on 50% of property in yr 4  Need to calculate adjustment  Payment to Revenue

35. Example 6B 4 th interval Total tax incurred=€675,000 Total revwd ded amt (70%)=€472,500 Base tax amt (€675k /20)=€ 33,750 Ref ded (€472,500/20)=€ 23,625 Int ded amt (€33,750 x 50%)=€ 16,875 Adjustment=€ 6,750

36.  Special rules  Caters for a change of more than 50% in taxable use  Revenue Example  Anti-Avoidance provision

37.  Section 4C  Property were subject to old rules  Now disposed of or let under new rules  Freeholds & ‘Freehold Equivalents’

38. Example 7  Doctor acquired freehold – May 2002  Price €1 million & VAT of €135,000  Used as GP surgery  Did not recover VAT  Sells property 1 st June 2009  Consideration - €1.5 million

39. Example 7  VAT Analyses  Not entitled to deduct initial VAT  No further development since acquisition  Property not chargeable  However joint option to tax

40. Positive VAT Adjustment Formula E x N T Where E=non deductible amount N=No. of full intervals remaining + 1 T=No. of intervals in the adjustment period

41. Example 7 Positive VAT Adjustment E=€135,000 N=12 + 1 T=20 Calculation €135,000 x 13=€87,750 20

42.  Surrender/Assignment in a legacy lease = a supply  not entitled to deduct VAT, may be entitled to CGS adj  Tax chargeable ◦ Person entitled to deduct initial vat ◦ Transaction occurs within 20 yrs  Legacy lease Adj.Period is shorter ◦ Since creation of lease ◦ If assigned, period remaining in lease  Tax not chargeable ◦ Where not entitlement to deduct VAT, ◦ But, may opt to tax (joint election)

43. Example 8  35 yr lease granted – 1 st July 2000  Capitalised Value = €1 million  Assigned to solicitor – 15 th April 2012  Formula T x N Y T = Tax incurred on lease N = Full intervals remaining + 1 Y = Total no. of intervals remaining in adj period

44. Example 8 T=€1,000,000 N=€8 + 1 Y=20 €1,000,000 x 8 + 1=€450,000 20  Solicitor self accounts for VAT  Reverse charge

45. ◦ Where not entitlement to deduct VAT, ◦ But, may opt to tax (joint election) ◦ Person taking the surrender/assignment accounts for VAT under reverse charge

46.  Transitional measures  Section 7B  Applies to waivers already in place  No new waivers after 1 st July 2008 (but opt to tax rules)  Wavier ceases to apply to lettings between connected parties  Relieving provisions ◦ Minimum level

47.  Example  Mr Scholar acquired a property in May 2005  Price €1 million & VAT of €135,000  Short terms lets to a grind school company which he owns  Waived exemption  Annual rent is €30,000 & VAT of €6,300

48. Minimum VAT – Calculation Formula A – B 12 – Y Where A=VAT deducted on the acquisition of property B =VAT paid to 30 th June 2008 Y =No. of full years since waiver

49. Minimum payment = A=€135,000 B =€19,950 (€6,300 x 3 + (€6,300 x 2/12) Y =3 Result €135,000 – €19,950=€12,783 12-3 Mr Scholar must charge an annual rent that produces a VAT liability of €12,783

50.  No VAT on transfer  Both parties are taxable persons  CGS implications

51.  Principal elements of a letting ◦ A substantially passive activity ◦ For an agreed period ◦ Payment of consideration ◦ Grants right to occupy property as owner ◦ Can exclude others from that enjoyment ◦ Defined area of space.

52.  Already seen additional consideration to compensate vendor for clawback of VAT on the CGS now taxable to CGT. ◦ Must factor this cost into compensation for CGS  Uncertainty regarding base cost for CGT where VAT entitlement changes ◦ Pragmatic approach

53.  If not entitled to VAT credit ◦ Capital Allowances on VAT inclusive cost of property  If entitled to VAT credit ◦ Capital Allowances on VAT exclusive cost of property  Position regarding change in VAT recoverability?