Supreme Court ruling leaves Revenue owing property companies millions

Property companies are set for a multi-million pound windfall at the expense of the Revenue Commissioners as a result of a Supreme Court decision yesterday.

The decision gives commercial property owners the right to reclaim VAT on expenses incurred after a property has been leased.

Millions of pounds in VAT repayments, going back 10 years, are now likely to be sought by companies in the new year. Pension fund assets will also be strengthened, while the decision could have a stabilising effect on commercial property rents, industry sources said.

The court ruling followed an eight-year legal battle by the Erin Executor Trustee company, which is part of a large pension fund business within the State. It claimed the Revenue Commissioners were wrong to insist that property companies could only reclaim VAT paid on expenses incurred prior to leasing. Companies leasing developed properties for more than 10 years must charge VAT at 12.5 per cent.

However, ongoing expenses incurred as landlords, such as rent reviews, maintenance and office overheads, had carried no entitlement to VAT refunds.

Mr John McGlone, director of VAT with KPMG, said many of the costs incurred post-letting involved VAT at the 21 per cent rate.

Under the VAT Act of 1972, back repayments could be sought for a period of 10 years and companies would now be pursuing that option.

Some companies could expect an annual benefit of "upwards of £100,000", he said. Total back money due was "hard to estimate but it will certainly run into millions of pounds. It could get into tens of millions". Mr Jim Somers, of Ernst & Young, who was involved in initiating the Erin Executor case, said the ongoing cost to the Revenue Commissioners was likely to be between £2 million and £3 million a year. He estimated the back payments due at between £10 million and £20 million.

Mr Somers said the court's decision would significantly reduce commercial property lessors' costs in the future.

It was anticipated last night that the Revenue Commissioners might try to restrict the back money element to the company which brought the Supreme Court case.

A Revenue spokeswoman would only say that the court's decision was "under review".

The Commissioners had argued during the court proceedings that to allow VAT rebates for the expenses involved would be contrary to EU law. It is considered unlikely that they would attempt to take the case to the European Court of Justice.

Mr Greg Lockhart, also of Ernst & Young, said the benefits of the decision would be widespread. Landlords could no longer cite VAT as an expense when carrying out rent reviews, so tenants could expect a positive impact on rents.