New VAT measure will up commercial property costs

Anti-avoidance measures in the Finance Bill 2002 will trigger large increases in the cost of commercial property for landlords and tenants, writes Siobhan Creaton.

The measure was designed to stamp-out the use of intermediary companies to reduce the amount of VAT paid on commercial property. Unless amended, experts claim it will impact on all commercial property leases and will result in much higher rents in the future.

Mr Fergus Gannon, a tax adviser at Deloitte & Touche, suggests the new provisions could add a further €1.5 million to the total cost of a €10 million commercial property development.

The key factor influencing the increased cost involved in these developments is that property investors will only be able to recover VAT costs incurred where the total value of the lease is at least equal to that cost.

But as the value of a lease is normally less than the entire cost of the property being developed, most landlords and tenants will be affected.

"Many ordinary commercial leases will be snared by legislation not intended to catch them. This will result in significant costs, in the form of irrecoverable VAT for property investors and, as their costs increase, the rents charged to tenants will also rise," according to Mr Gannon.

The provision was aimed at eliminating practices typically where a school or charity would set up an intermediary company to buy a property and then lease it back.

This would allow them to dramatically reduce the VAT costs involved.

Tax practitioners have raised the issue with the Revenue Commissioners and the Department of Finance, and are calling for the legislation to be reconsidered.

The Bill went through the committee stage in the Dáil yesterday. Amendments are planned at second stage.