Finance Bill will address VAT anomaly

An anomaly that has left commercial property investors facing a 13.5 per cent VAT bill they cannot reclaim will be addressed under the Finance Bill.

Pensions funds and other commercial property buyers have been confronted with a substantial and unexpected VAT charge when they buy property with sitting tenants who have carried out construction work on the premises.

"The current situation," said Mr Aidan Fagan, indirect tax partner at Deloitte, "is that there was effectively a double charge to VAT on certain property transactions."

When landlords grant a lease on a property to a tenant in, say, a store or a shopping centre, that lease is subject to VAT. If no development work is done on the property subsequently, there is no charge to VAT when it is subsequently sold.

However, if the tenant carries out anything other than minor development work, the property again becomes "Vatable", with a subsequent buyer having to pay 13.5 per cent VAT in addition to the purchase price.

Under Revenue rules, this money is not reclaimable.

"As you can imagine, a 13.5 per cent cost, which even in the case of a modest building could be many millions, has very much a dampening effect on the market," said the Deloitte partner.

A certain amount of development work has been permitted on properties without them reverting to the VAT net under existing Revenue rules. However, this has been limited to 10 per cent of the sale value of the property with an upper limit of €300,000 - a figure which, Mr Fagan says, allows very little leeway given the current cost of building work.

"VAT has been getting in the way of commercial reality in relation to the movement of property," said Mr Fagan. "You have a situation where a relatively small amount of work could affect the marketability of a property."

He said that, in extreme cases, the VAT charge could result in the sale or lease of a property not taking place.

While no precise figures are available for the amount of property affected by the existing rules, accountants say that the fact that the Revenue is proposing a change in the Finance Bill shows that it is seen as significant enough. "It would be a factor for people trying to sell commercial property," said Mr Fagan.

Deloitte said the proposed change by Revenue was very welcome and went some way to addressing what was "a nonsense".

Mr Fagan said he hoped other "glaring anomalies" in the VAT code which impact seriously on "routine property transactions" would also be addressed shortly. "VAT is a complex tax but VAT on property stands out on its own for complexity."