Compliance with new rules will require detailed research

The much awaited Revenue Commissioners' guide on the new VAT rules applying to property transactions has been issued

The much awaited Revenue Commissioners' guide on the new VAT rules applying to property transactions has been issued. The guide deals with the operation of the new regime with effect from March 26th last. The main changes are in relation to the treatment of assignments, surrenders, and postsurrender disposals of interests in property. In simple terms, the new rules ensure that these are now treated in a similar manner to the original creation of an interest in developed property.

However, the detailed rules are extremely complex and, apart from a thorough knowledge of the relevant legislation, parties to property transactions will need to be familiar with the VAT history of their property interests in order to apply the correct VAT rate.

The changes being introduced are designed to prevent VAT exempt entities from avoiding VAT when acquiring interests in developed property. However, the impact extends to practically all entities engaged in commercial property transactions. Pension funds and other entities acquiring properties with sitting tenants as investments will be the main victims of the new regime.

In order for them to apply VAT correctly to surrenders and postsurrender transactions, they will need to know the VAT history of the properties and the VAT status of the occupants, even though they would not have been a party to the initial leases or assignments. In order to appreciate the complexity, consider the position of shopping centre owners. They will need to know in the case of each individual tenant - and remember that a centre such as The Square in Tallaght has about 110 tenants, the ILAC, 70 and the Jervis Centre, 45 - whether VAT arose when they acquired their premises and if VAT did arise, whether they were entitled to any recovery.

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If VAT did not arise, the owners will need to establish why it did not. For instance, their interest may have been acquired in connection with the transfer of a business, in which case VAT would not have arisen. However, for the purposes of determining whether VAT is chargeable on a subsequent transaction, e.g. a lease, a VAT charge is deemed to have arisen at the time of the transfer. Whether any VAT recovery entitlement arose mainly depends on the VAT status of the tenant's activities.

But this is not always easy to determine. For instance, while one would expect that branches of banks and insurance companies would not qualify for VAT recovery entitlement on the basis that their core activities are VAT exempt, they can, in fact, be entitled to a small level of VAT recovery.

Accordingly, it is clear that compliance with the new regime will require detailed research, with tenant co-operation, on the part of shopping centre owners.

In view of the complexities involved, I have no doubt that numerous property transactions have been dealt with incorrectly from a VAT viewpoint since March 26th, 1997. This could result in significant VAT liabilities and possible interest charges for the parties involved.

It is disappointing that the Revenue guide gives no indication of the Revenue adopting a lenient approach in situations where due to the complex nature of the new regime, incorrect VAT treatment is applied.

Indeed, if anything, the position would seem quite the opposite. The August, 1997, edition of Tax Briefing issued by the Revenue contains a notice regarding the change of Revenue policy in relation to "no loss of VAT to Revenue" situations. This notice applies to all transactions subject to VAT including property transactions.

It states: "it is recognised that complexities in this legislation, for example transactions involving foreign traders, can give rise to interpretative difficulties" but "notwithstanding such difficulties, there is an obligation on the parties involved in such transactions to ensure that legislation is correctly applied". With effect from September 1st, "strict application of the VAT Act is required in all transactions entered into on or after September 1st, 1997" and that "all suppliers of goods/services will be held responsible for the VAT chargeable".

It also states that the question of statutory interest will be considered in every case where a VAT undercharge arises.

It is clear that all parties to property transactions will need to come to grips with the new VAT regime, and despite the complexities, they should not expect any sympathy from the Revenue if they do not apply the correct VAT treatment.