The Government is to extend the scope of the VAT cut on apartments to purpose-built student accommodation and possibly to forward-funding deals.
To boost the viability of apartment construction, the Government lowered the VAT rate on new-build apartments from 13 to 9 per cent in the budget.
The lower rate does not, however, apply to forward-funding arrangements, where an investor agrees to buy finished apartment units from a developer in advance of completion which, for VAT purposes, is classified as site and construction services.
With approved housing bodies (AHBs) and property funds increasingly using forward-funding deals to acquire apartments, critics claim the omission will create a price anomaly in the market.
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During a Dáil debate last week, Minister for Finance Paschal Donohoe, however, signalled he would bring forward an amendment to the Finance Bill – which is at the committee stage of the legislation schedule – “to clarify that the 9 per cent rate applies to purpose-built student accommodation that falls within the definition of apartment blocks”.
He also indicated he would consider extending the measure to include site and construction services.
“In order to maximise the impact of this measure on the supply of new apartments, I have asked my officials to examine the potential to broaden the scope of the rate of 9 per cent to include site and construction services provided for qualifying new apartment developments,” he said.
“This is with a view to bringing more apartments within the scope of that rate.”
The majority of social housing units are delivered by private developers in what are known as turnkey projects, where the local authority or AHB enters into a forward-funding contract with the developer.
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“The current VAT framework creates a price anomaly for housing bodies and developers involved in forward-funding or design-and-build contracts, as only completed apartment sales benefit from the 9 per cent rate,” said Janette Maxwell, tax partner at Grant Thornton Ireland.
“The Minister’s comments indicate a willingness to address this issue, which could have significant implications for the supply and pricing of new apartments.”
The budget contained a suite of tax measures to stimulate the supply of housing.
The Government has also changed the design standards for apartments and revamped the State’s system of rent controls in a bid to entice investors back into the market.
The Coalition has set a target of building 303,000 homes between 2025 and 2030, when its term in office is due to end. The headline target would mean delivering an average of 50,500 homes per year but new home completions are not expected to hit that level this year or next.
On the back of third quarter housing completion numbers last week, Bank of Ireland predicted the full-year total was likely to be in the region of 34,500.
However, the bank’s chief economist Conall Mac Coille noted that the 33,000 units completed in the year to the third quarter was the highest number of units delivered since the Celtic Tiger period and came against several predictions that home building might contract in 2025.
