Retrospective VAT rise to hit first-time house buyers

First-time buyers will be hit by new VAT charges even though they entered into contracts before this week's Budget

First-time buyers will be hit by new VAT charges even though they entered into contracts before this week's Budget. Up to 8,000 purchasers struggling to raise the €200,000-plus price of the average new home will be hit by the retrospective charges.

The Minister for Finance, Mr McCreevy, raised the lower rate of VAT by one percentage point to 13.5 per cent in the Budget, hitting a range of goods including new homes.

But the higher charge will affect any payments by homebuyers after December 31st, regardless of when the contracts were signed. Up to 90 per cent of payments on a house are not made until the house is completed and the contract closed, leaving people waiting to move into their homes after Christmas facing a bill of more than €1,600.

This comes in addition to the loss of the €3,810 first-time buyer's grant announced in the Estimates. The only comfort comes in the form of a rise in the amount of mortgage interest on which relief is granted and the numbers of years at which first-time buyers can claim maximum relief. These rises will amount to only €1,409 extra over a seven-year period for a single person and double that for married couples.

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The Minister's move on VAT has been condemned by the Irish Home Builders Association. Director Mr Ciaran Ryan said it was turning builders into VAT collection agents for the State.

"We are talking about around 8,000 people and the amount concerned is not huge from a Government point of view," he said. "Targeting buyers already in the chain will yield a miserable amount for the Exchequer but will hit individual buyers hard. And they accuse builders of being greedy!"

Deloitte & Touche VAT partner Mr Aidan Fagan was surprised Mr McCreevy failed to protect existing contracts. "The last time this level of VAT was increased, in 1993, there was a specific change in the legislation to ringfence contracts that had been signed pre-Budget.

"It seems logical that a Budget Day measure should only apply, at worst, to contracts signed after that date."

The Department of Finance confirmed last night that no legislation or other transitional arrangement was planned to exclude those already in the contract process from the rise.

Its decision followed a call from Labour party finance spokeswoman Ms Joan Burton for the Minister to clarify his intent on VAT. "This will be particularly hard on young people, who have not only been hit with the loss of the first-time buyer's grant but will now have to pay an extra VAT charge as well."

Dominic Coyle

Dominic Coyle

Dominic Coyle is Deputy Business Editor of The Irish Times