A controversial cut in VAT on apartments could lead to fraudulent or inadvertent underpayments of tax by the construction sector, the Revenue Commissioners warned Government in advance of Budget 2026.
The Government lowered the rate that applies to the sale of new apartments to 9 per cent from 13.5 per cent in the budget last October in what it said was an effort to address the “viability gap” after a dramatic fall in the number of new apartment projects.
However, internal records reveal concerns were raised that putting in place different VAT regimes for houses and apartments was risky. Previous advice from the Revenue Commissioners said such systems could “be found to be in breach of the principle of fiscal neutrality”.
More starkly, they also said it would be extremely difficult for them to monitor when different tax rates applied to different types of housing. “[It] could lead to accidental or fraudulent underpayments of VAT,” Revenue said in a pre-budget submission.
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In the document – prepared for then minister for finance, Paschal Donohoe, in advance of the budget, the Department of Finance acknowledged the concerns. However, the submission said the change matched existing social policy goals and Government attempts to ease the housing crisis.
A note from the minister said: “We will go ahead with VAT on apartments only, beginning night of budget. This decision is aligned with broader housing [and] economic policy goals.”
In the submission, finance officials explained how many apartments were not viable to build and that the VAT cut could help bridge that gap. It said the intention was to encourage more development “rather than leading to a reduced price for the consumer”.
Officials said the VAT cut would apply to all apartments, from “high value accommodation” to those built for social housing. They added that speedy introduction was important because some buyers might delay purchases believing it would have an impact on prices.
“However, it is not expected that there would be any advantage to consumers who might choose to wait for the lower VAT rate to come into effect,” it said.
The submission also said the measure would need to be in place for, at the very least, three years to cover the “full planning and development life cycle. Given the possible delays that can affect larger projects in terms of planning delays, it is suggested that five years could be a more reasonable time frame.”
They proposed a “sunset clause” of December 2030 which Minister Donohoe agreed to.
