V.A.T. on Residential Property

Brief Overview

A large number of residential property investors registered for VAT and obtained VAT refunds on the purchase of new residential properties over the last number of years. The ability to claim VAT refunds for residential property was abolished in the 2007 Finance Act. We explain below the rules of the VAT system and the implications of selling a property for which a VAT refund was obtained. The rules of the VAT system are complicated and it is important that all of the VAT requirements are properly dealt with. If they are not, interest and penalties can arise on any VAT that is due to the Revenue and is not paid on time.

If you are VAT registered property investor, you must collect VAT on all your short-term rental income. This reduces your rental income for income tax purposes and in effect saves you tax. You cannot leave the VAT system without repaying the balance of the VAT refund owed to the Revenue Commissioners. This should be examined prior to any sale of the property. Professional advice should be sought to examine your own particular circumstances – click here for further details.

You can claim back all VAT costs on all VATable expenses relating to the property. You must submit VAT returns on a bimonthly basis for the first year and you then have the option of completing an annual return combined with a monthly direct debit payment.

New VAT Rules for Property Transaction

A. General
A new set of rules was introduced with effect from 1st July 2008. A new concept called the Capital Goods Scheme (CGS) now applies for all property transactions. The new rules are complex and there are very detailed transitional rules which apply to properties already in the VAT net before July 2008. We can provide detailed advice on how these rules operate for commercial property transactions subject to an extra charge.

B. Residential Property Investors
The intention of the new rules is to ensure that there is no loss of VAT to the Revenue. If your residential property was in the VAT net prior to July 2008 and it is not let to a connected person (close relative), then the old rules regarding repayment of the VAT continue to apply.

If your property is let to a connected person at any time then the new rules could have application and involve immediate repayment to the Revenue of the remaining part of your original VAT refund not yet repaid to the Revenue.

VAT Returns for Properties Within The VAT System 

Once you are registered for VAT purposes the Revenue Commissioners will issue VAT return forms to you. The calendar year is divided into six VAT periods i.e. January/February, March/April, May/June and so on for the year. However a new simplified payment arrangement for VAT has been introduced by the Revenue. The new arrangement consists of biannual filing and payment where total VAT payments for the year are €3,000 or less, and four-monthly filing and payment where total VAT payments for the year are between €3,000 and €14,000.

The schedule for VAT payments and returns will be as follows:

Total VAT payments for the year of less than€3,000

Tax Period

Frequency

File & Pay

Jul/Dec 2015

Biannual

Biannual VAT 3 return and payment (if due) by 19 Jan 2016.

Jan/Jun 2016

Biannual

Biannual VAT 3 return and payment (if due) by 19 July 2016.

Jul/Dec 2016

Biannual

Biannual VAT 3 return and payment (if due) by 19 Jan 2017.

Total VAT payments of between €3,000 and €14,000 for the year

Tax Period

Frequency

File & Pay

Sept/Dec 2015

Quarterly

Quarterly VAT 3 return and payment (if due) by 19 Jan 2016.

Jan/Apr 2016

Quarterly

Quarterly VAT 3 return and payment (if due) by 19 May 2016.

May /Aug 2016

Quarterly

Quarterly VAT 3 return and payment (if due) by 19 Sep 2016.

Sep/Dec 2016

Quarterly

Quarterly VAT 3 return and payment (if due) by 19 Jan 2017.

Payment and filing requirements will continue on a similar basis thereafter.
These new arrangements should be of benefit to individuals registered for VAT in respect of residential investment properties as they reduce the paperwork involved.

Completion of VAT Returns

The VAT return form is very simple and easy to complete. The return form should be sent directly to you by the Revenue.

You should obtain VAT invoices for all expenses incurred for the property e.g. repairs, new furniture etc, on which VAT was charged to you. These invoices are needed to complete your VAT return.

You divide your invoices by date order into the relevant VAT period e.g.

If you qualify for the new arrangements for completion of VAT returns as explained above use the new longer VAT period as appropriate.

Summarise the total amount of the VAT incurred according to your invoices for the VAT period in question, which is called your VAT on Purchases. The total is entered in Box T2 on the VAT return form.

You must then calculate the VAT included in your rental income if any earned for that VAT period.
Example:

This is known as your VAT on Sales. The total is entered in Box T1 on the VAT return form. If you had no rents in the VAT period your VAT on Sales figure is NIL

You then deduct the VAT on Purchases figure from the VAT on Sales figure and the result will either be a refund due to you (Box T3 on the VAT return form) or an amount owed to the Revenue (Box T4 on the VAT return form) depending on the amount of your VAT claims for the period.

In practice, you will likely owe the Revenue an amount of VAT for each VAT period unless significant expenses have been incurred in the particular VAT period you are dealing with.

As an alternative to completing VAT returns during the year you can elect to go on a yearly VAT return combined with a monthly direct debit in favour of the Revenue. You will have to estimate your monthly rent for the year ahead and allowable VAT expenses and then balance out the figures in the yearly return. This arrangement would not work in your favour if the property was empty for a few months during the year as you would still be paying VAT by direct debit. Any overpaid VAT would of course be repaid after the end of the tax year. In practice most people stay with the completion of the bimonthly VAT returns as it ensures that the correct amount of VAT is paid during the year and also ensures that the job is dealt with on an ongoing basis rather than having to work out a yearly return after the end of the year.

TAX SAVING TIP
The initial VAT refund obtained when you purchased the property is like a loan from the Revenue which is being repaid out of your rental income. It is important to check the amount of VAT that is being repaid back to the Revenue to ensure that you do not repay more than the initial VAT refund that you received. You should arrange that your VAT registration is cancelled as soon as the initial VAT refund has been repaid to the Revenue. If you overpay the VAT you are not entitled to get it back.

VAT – Other Rental Properties

If you claimed a VAT refund on a new residential property and you had older properties which you have already let out then you have to collect VAT from all short-term rental income in respect of all your properties. This makes your position more complicated for VAT purposes. In reality this means that you will repay your original VAT refund back to the Revenue in a faster time period than if you had only one rental property and will then be able to cancel your VAT registration faster without penalty.
A very important point arises here if you decide to sell one of your older properties. Although the older property is in the VAT system for rental purposes VAT is not chargeable on the sale proceeds for the older property because no VAT was refunded when you bought the property.

VAT – Sale of Property for which VAT refund obtained

When a property for which a VAT refund was obtained when purchased is sold then you must charge VAT on the sale proceeds. In effect, the Revenue reclaim the VAT refund that they originally gave you. If you have owned the property for a number of years then you will have been repaying the initial VAT refund out of the rental income earned from the property since it was first let. This means that the amount of VAT owed to the Revenue has decreased. However if the property has gone up in value you could end up owing a higher amount of VAT back to the Revenue because the VAT on the sale will be calculated on the sale proceeds. If you have only one property in the VAT system it is easy to overcome this problem by cancelling your VAT registration in the VAT period preceding the VAT period in which the property is sold. The amount repayable to the Revenue is then calculated as the amount of the initial VAT refund minus all VAT paid over to the Revenue since then. The fact that the property is sold for more than you paid for it is ignored for VAT purposes. This is a very important point to bear in mind if you have a single property within the VAT system.

There will also be situations where an investor has a number of properties within the VAT system and is selling one of them. Assuming that VAT refunds were obtained on all of the properties then it will not be possible to cancel the VAT registration when one of the properties is being sold without having to repay a very large amount of VAT back to the Revenue. In this situation VAT will be collected out of the full sale proceeds of the property that is being sold and will have to be paid to the Revenue. There is a long term benefit in that the amount of the initial VAT refunds owed back to the Revenue is reduced by the VAT due on the sale proceeds of the property.

VAT – Example of Calculation for New and Existing Properties 

Assume Mrs Smart had two rental properties generating monthly rental income of €2,400 and that she bought another residential investment property for €300,000 and obtained a VAT refund of €34,000 thereon. The new property has also been let at €1,200 per month.

What will the ongoing VAT payments to Revenue be?

Ongoing V.A.T. payments

VAT due out of Rental Income

(a) Existing Properties 2 months rent @ €2,400 per month

€4,800

(b) New Property  2 months rent @ €1,200 per month

€2,400

(c) Total Gross rents for period ((a) + (b))

€7,200

(d) VAT included in rents ((7,200/1.23) @23%)

€1,346

(e) Total Annual V.A.T. payable to Revenue ((d) * 6)

8,078

Result  It takes just over 4 years to repay the initial VAT refund of €34,000. Assuming a top rate taxpayer Income Tax/PRSI, €15,000 will have been saved over the period i.e. a cash saving of over €300 per month.