Indirect Tax Matters
The aim of my presentation is to highlight some indirect tax risk areas that arise in property transactions and in particular in property sales and disposals of what are known as “legacy leases”1. This is not a comprehensive list of indirect tax risks that could arise on the sale of a property/assignment or surrender of a legacy lease but the highlighted risks all demonstrate one of the two following characteristics: 1. I am seeing them on a recurring basis; and 2. They are surprising to the parties to the transactions. As well as looking at VAT risks I have also been asked to comment on the new eRCT provisions. Relevant Contracts Tax is an area that continues to amaze in its capacity to catch out the unwary. Ostensibly a relatively benign tax, its bite is very much worse than its bark. Although I am focusing on the rules on compliance I will also mention some topical risk areas where RCT bears its teeth. There have not been fundamental changes to legislation regarding VAT on property in the last two years. Accordingly the core principles in this paper are as per the Finance Act 2010 edition of VAT on Property. As mentioned above, I have selected the most frequently arising topical issues and some areas of hidden risk as the focus of today’s paper.
VAT on Property Contractual Considerations As advisers we are required to review and advise upon the legal documentation underpinning a sale and confirm that the documents as drafted are appropriate to the transaction and reflective of the correct VAT treatment. For sales of property, as well as reviewing the contracts we will generally have to complete pre-contract VAT enquiries. Both Special Condition 3 (the clause that deals with VAT on the sale of a property) and the Pre-Contract Enquiries can be daunting to the uninitiated, however
1
Legacy Leases are leases that were granted before 1 July 2008, were for a period of 10 years or more and were subject to VAT on their grant with the VAT being calculated on the capitalised value. They are so called because they are a legacy from the pre‐1 July 2008 VAT system.
a systematic approach and seeking a full understanding of what is being asked will help alleviate many of the problems. Pre-Contract VAT Enquiries This is a document which has been prepared by the Law Society of Ireland. It should be raised by a purchaser on a vendor and to which replies should be received prior to signing the contract for the purchase of property. What is currently in general use is the Law Society published working draft of this document. Obviously, given the quantum of ongoing changes to the VAT on property legislation this document will probably be subject to further revision over time. Practitioners are advised that any such amendments will be communicated to the solicitors’ profession in due course. The document should be raised by the purchaser and responded to by the vendor at the pre-contract stage. This is vital if the purchaser’s adviser is to be in a position to advise his or her client on the VAT implications of a transaction. The document should also prove to be a useful tool for a vendor and should be completed by the vendor prior to the drafting of the contract for sale thus enabling the vendor to draft the VAT special condition appropriately according to the circumstances of the transaction. I would recommend that, on closing a transaction, the purchaser seeks confirmation from the vendor that the replies in the document are still correct and accurate. The document is divided into 7 parts, which are as follows: •
Section 1 - No VAT chargeable on the sale.
•
Section 2 - Vendor charges VAT at 13.5% rate.
•
Section 3 - Purchaser self accounts for VAT at 13.5% rate.
•
Section 4 - Transfer of Business (TOB).
•
Section 5 - Sale of Let Property.
•
Section 6 - Vendor charges VAT at 21% rate.
•
Section 7 - Tenant’s Refurbishment.
The purchaser should ensure that the vendor has answered all enquiries in the section(s) which are relevant to the sale of the property and has done so in full.
In this context, before answering the enquiries, the vendor should be satisfied as to the VAT status of the property and the accuracy of the replies, as these will be relied upon by the purchaser. In essence the pre-contract enquiries are designed to have the seller explain the background to the property and the VAT treatment that will apply to sale of the property. For example, if the sale of the property is taxable on the basis that it is the first sale of a new property (broadly speaking a “new property” is one which has been developed in the last 5 years) as well as confirming that VAT will be charged under section 1, the Vendor is directed to section 2 to confirm why VAT will be charged i.e. because it is a new property. Although there are 7 sections where the vendor is selling a new property you need only concern yourself with sections 1 & 2. The enquiries are so detailed because they deal with every type of sale/assignment or surrender of a legacy lease. With practice you will become familiar with the sections that apply to your transaction and the process of completing the enquiries will become quicker and more straightforward. The area where advisers should be most wary is where the client is seeking the purchaser’s agreement to the option to tax. As you might expect from a purchaser’s document there are some searching questions as to why the vendor is requesting the option to tax and more importantly what benefit the vendor will derive from the purchaser making the option. Enquiry 3.2.2 asks what VAT the vendor will be entitled to recover as a result of the option to tax. Enquiry 3.2.3 asks what VAT clawback the vendor will avoid as a result of the option to tax. Enquiry 3.2.4 asks what compensation would the vendor require not to opt to tax the property. These enquiries obviously ask for you to disclose information that the vendor would generally prefer not to disclose and it is, in my view at least, a judgment call on behalf of the vendor’s adviser whether to answer these particular enquiries. Certainly pre-contract enquiries are not questions that should be completed without full awareness of the potential implications those answers may have on the transaction as a whole.
Property Transaction Contract Clauses - VAT Special Condition 3 of the Law Society of Ireland (Law Society) General Conditions of Sale is the clause or the foundation of the clause governing VAT from a contractual perspective in relation to the sale of freehold interests, freehold equivalent interests, and the assignment or surrender of legacy leases.
I have included the current version in use in Appendix 1. This version printed here does not include the guidance and footnotes present on the Law Society General Conditions of Sale, and this version is included here so that those involved in property transactions can familiarise themselves with the nature of the clause. I would point out that at the end of the pre-contract enquiries the Law Society has included guidance on the various parts of special condition 3, and those not familiar with the clause would be well advised to read this guidance in advance of reviewing the version of the clause in any particular agreement.
Please note that this version of Special Condition 3 may be subject to revision over time. Any such amendments are communicated to the solicitors’ profession. The key point to note about the clause is that it is drafted from the vendor’s perspective therefore, as drafted, it has a bias toward the interest of the vendor. Those advising purchasers have to be very careful as to what is included in the clause. I have selected two instances where the clause could catch out an unsuspecting purchaser. Firstly in Section 3.3.1, which deals with the sale of a property that would be exempt, e.g. on the basis that it would be an old property, in the absence of the option to tax. It is important to remember that the option to tax is a joint option. In other words the purchaser has to expressly agree to it and that agreement should be in writing. Section 3.3.1 provides that the purchaser agrees to the option to tax and will account for the VAT arising on the sale. It would be easy for the purchaser to unwittingly sign up to the option to tax, especially if the entire clause is simply dumped into the sales contract (which does happen!) and the purchaser isn’t fully aware of the subtlety of VAT on property legislation and their rights under that legislation. The second instance deals with the situation where the vendor is assigning or surrendering a legacy lease where there is a refurbishment in the property that is still within the Capital Goods Scheme (CGS) adjustment period. In these circumstances the vendor has to repay an amount of VAT recovered on the refurbishment unless the purchaser agrees to take over the capital good. By taking over the capital good the purchaser effectively takes the risk of having to make future adjustments should the property be put to an exempt use. This is not a risk a prudent purchaser would be prepared to take unless it was absolutely sure no future adjustment would arise. However under condition 3.10 this is exactly what the purchaser agrees to do.
It is in no way my intention to criticise Special Condition 3. It is long and complex because it has to cover a raft of different types of transactions and the VAT law relating to those transactions is long and complex. It is in fact a well thought out clause and drafting it required significant time and expertise. The Law Society are to be applauded for the work so evidently put in. However, notwithstanding this praise, purchaser’s advisers must be wary of the traps for their clients. There may be a requirement to amend the standard text, where appropriate.
Opting to Tax Where a taxable vendor makes a sale to a taxable purchaser that would otherwise be exempt, the two of them can agree that the sale will be VATable. The purpose of doing this is usually to either avoid having to repay previously recovered VAT to the Revenue Commissioners Revenue or, in some circumstances, to obtain a refund of additional VAT from the Revenue. It is the CGS which determines whether a payment or repayment arises. Although I do not propose to go into a detailed exposition of the CGS in this paper, it is in essence the method by which VAT recovery on a property is regulated. To use an example, if a businessperson was selling an “old building” the sale would be exempt from VAT. The seller and the purchaser could agree to make that exempt sale VATable. If this option to tax is not exercised, the vendor will suffer a clawback of any VAT which he previously recovered in relation to the acquisition of the building within the last twenty years and a clawback of any VAT previously recovered in relation to any refurbishment within the last ten years. The option to tax means the vendor avoids this VAT cost but the sale of the building becomes subject to VAT. If a seller and a buyer agree to make an exempt sale VATable, they are said to agree a “joint option for taxation”.
The following are of relevance for these situations: •
Both seller and buyer must be businesspersons; if I was selling my house to you, we could not agree a joint option for taxation.
•
The joint option for taxation must be made by the 15th day of the month following the month in which the sale is made.
•
It does not have to be submitted to the Inspector.
•
The option has to be in writing. In most cases the option will be in writing because it is included as part of special condition 3 which is the standard VAT clause inserted in the Law Society Contract for Sale.
Where a joint option to tax is exercised, it is the purchaser’s responsibility to account for the VAT arising on the sale. Let’s say that the VAT on an opted sale is €1m. The seller will not charge VAT on the sale. The purchaser will increase the VAT payable (box T1 of the VAT return) by €1m. They will also increase the VAT deductible (box T2) to the extent that they are entitled to recovery. If they are entitled to, say, 60% recovery, the figure in box T2 will be €600,000. That means that the purchaser suffers irrecoverable VAT amounting to €400,000. If the purchaser is entitled to full recovery, the two figures will self-cancel. Opting to tax is a matter for negotiation between the buyer and seller, like other aspects of the sale. There are two advantages for the seller: 1) The seller will not have a clawback of input VAT and might even have additional recovery. 2) The seller will be entitled to recover VAT on the costs of sale.
If the purchaser is entitled to full recovery, you might think that opting to tax is a “nobrainer”. However, even where the purchaser has full VAT recovery, the decision to opt to tax is not as straightforward as it may seem at first. If the purchaser agrees to opt to tax the sale, he/she will be acquiring a “capital good”. That means that he will have Capital Goods Scheme (CGS) obligations in respect of that property. Under the CGS, if he/she uses the property for an exempt purpose at any time in the 20 years following purchase, he/she will have to pay back to Revenue some of the VAT he/she recovered on purchase. Likewise, he/she will have to pay back to Revenue some of the VAT he/she recovered on purchase if he/she makes an exempt sale of the property at any time in the 20 years following purchase. Having an otherwise exempt property bought within the CGS is a real burden for a purchaser. In the absence of significant redevelopment, any future sale of that property will be exempt from VAT and the purchaser will be relying on any future purchaser to agree to opt to tax the sale and if (as could very well be the case) the purchaser refuses to do so, he/she will be faced with a significant clawback of
VAT that would never have arisen had he/she not agreed to opt to tax her purchase in the first place. Furthermore if he/she were to use the property for an exempt purpose e.g. a letting without an option, he/she would also have to repay some of the VAT recovered on the original acquisition. Even for a purchaser that has full VAT recovery, agreeing to opt to tax a property brings with it very real dangers. The purchaser’s agreement to opt to tax is a valuable commodity and a prudent purchaser should consider whether they should be compensated for that agreement. Clearly if the purchaser does not have full VAT recovery the preference would be not to opt, and to get the property without any VAT cost. Conversely the initial reaction of a seller, may be to charge VAT on sale and that it is not negotiable. This would be because it does not want to have a clawback of inputs and it also wants to be able to recover VAT on the costs of sale. There may be a better option, particularly if the purchaser is not entitled to recovery.
To illustrate say I was charged €125,000 VAT when buying a building and I recovered it all. Suppose that I am selling it to you, VAT-exempt, ten years later, for €4m. Do Not Opt to Tax I will have to pay €62,500 back to Revenue (I am selling it half way through 20 year life), and I will not recover the VAT on the costs of sale. If we assume that VAT on the costs of sale is €10,000, then the total VAT cost of the transaction for me will be €72,500. Opt to Tax I will charge you VAT of €540,000. If you are a dentist, and so, supplying only exempt services, you will not recover the VAT that I charge you. The choice is: (1) I lose €72,500 in VAT; or (2) You lose €540,000 in VAT. Between the two of us we have a choice of giving €72,500 or €540,000 to Revenue. If we are sensible, we will arrange for the former. If we agree not to opt, and we
agree to increase the sale price by €306,250, we will each gain €233,7502. You will pay me €306,250, instead of €540,000, making you better off by €233,750. I will receive €306,250 more in sale price, out of which I will pay €62,500 to Revenue, and I will have €10,000 disallowable input VAT. That will make me €233,750 better off. The parties of course would have to take other taxes into account when crunching the relevant numbers3. In summary, the decision as to whether to opt to tax should be be given due consideration. A purchaser must be extremely wary of agreeing to such a joint option because of the following implications if he so agrees:•
It brings an otherwise VAT exempt property into the VAT net
•
The purchaser has effectively created a capital good for which he must maintain capital goods records
•
The purchaser must monitor the use of the property for the next 20 years or until sold
•
The purchaser will have an exposure to VAT costs for any VAT exempt use of the property over the next 20 years
•
If the purchaser wants to sell at anytime in the next 20 years he will have to get the purchaser from him to agree to a joint option, otherwise he will incur VAT costs
For the vendor the benefit of the joint option is either avoiding VAT costs, or, alternatively, recovering VAT previously disallowed, with, as far as I can see, no benefit, but rather risk, for the purchaser. Thus, in this context it is imperative that the practitioner acting for the purchaser, on receipt of the draft Conditions of Sale from the vendor, receives responses to the Pre-Contract VAT Enquiries to satisfy himself of the correct or better VAT treatment available for his or her client.
The CGS Implications of Connected Party Sales As part of my presentation I am focusing on those risks associated with VAT on property transactions that are not immediately obvious. They are the more obscure risks, that will not arise on every transaction but this often means that they are 2 3
Ignoring the direct tax implications of the additional consideration. See Tax Briefing 3 of 2010 “The VAT Capital Goods Scheme – Direct Taxes Implications”
missed when they do apply. The first of these “hidden” liabilities relates to a clawback that can arise under the CGS (section 64(8) of the VAT Consolidation Act) when a property is sold to a connected person. In essence when you sell a property to a connected person the VAT on the sale has to be at least equal to the VAT you were charged on acquiring the property. In applying the test the VAT charged on acquiring the property is reduced in accordance with the number of full intervals that have passed in the adjustment period. The VAT incurred as reduced by the intervals elapsed is called “the adjustment amount.”
If you sell a property to a person connected to you and the amount of VAT that is charged on the sale is below a specific amount which VAT law terms “the adjustment amount”, the seller has to account for the difference between the VAT charged and the adjustment amount as if it was VAT on the sale. The “adjustment amount”, which the VAT on the sale has to be equal to or higher than, is calculated using the following formula. H×N T Where: H = the tax the seller paid on acquiring or developing the property N = the number of intervals remaining in the seller's adjustment period plus 1 T = the total number of intervals in the adjustment period. If the “adjustment amount” is higher than the VAT charged on the sale then the following formula applies: I–J
Where: I is the “adjustment amount”; and J is the VAT charged on the sale.
You have to pay the difference between the adjustment amount and the VAT charged in your VAT return for the period in which the supply takes place. This provision is designed to stop the following type of arrangement: A Bank has a leasing company with 100% VAT recovery and a domestic lending company with no VAT recovery. If the bank wants to buy a new building for €10 million to be used by its lending company it could buy the building through its lending company and pay the VAT of €1.35 million and not recover any of the VAT charged. Unless it subsequently used the building for VATable purposes within the adjustment period, it would have no subsequent VAT recovery entitlement in relation to the building. Alternatively it could get the leasing company to buy the building and use it for a year and then sell it on plus VAT to the lending company. Say this sale was at €5 million. Subject to market value rules and in the absence of this anti-avoidance provision, this would be a very VAT efficient way for the group to acquire the building. The leasing company would recover VAT of €1.35 million when it buys the property. It would retain this VAT recovery for the initial interval as it used the property for its leasing business. In the second year it makes a taxable sale of the property to the lending company. It would charge VAT of €675,000 to the lending company. As it has made a taxable sale of the property it would be deemed to have used the property for a fully taxable purpose for the remainder of the adjustment period. Therefore it would not have to pay back any of the VAT it had recovered. The lending company could not recover any of the VAT charged to it on the sale but it has been able to acquire the building and has only had to pay 50% of the VAT it would have had to pay if it had bought the building direct from the developer. However under s64(8) you have to ask whether the VAT charged on the sale from the leasing company is sufficient to meet the adjustment amount. To answer this question the first thing we need to do is to work out the adjustment amount. Total tax Incurred = €1,350,000 Number of intervals remaining plus 1 = 20 Total number of intervals = 20
€1,350,000 x 20/20 = €1,350,000
The second thing we have to do is compare the adjustment amount to the VAT charged on the sale to its connected company. I (the adjustment amount) – J (VAT charged) €1,350,000 – €675,000 = €675,000
The leasing company would have to pay VAT of €675,000 when it sells the property. This is in addition to the €675,000 that it has to pay on the sale. The total VAT that the leasing company has to pay is €1,350,000. There was no advantage for the bank in buying the property through an associated company. However parties to a "connected sale" that would otherwise give rise to the payment of an adjustment amount can enter into a written agreement that the purchaser will take over the capital good from the seller. By so doing, the seller will not have to pay an adjustment amount. The purchaser steps into the seller’s shoes for the remaining intervals of the adjustment period and is responsible for carrying out any future adjustments. There are market value provisions in the VAT Act that allow Revenue to apply market value to transactions between connected persons where the purchaser was not entitled to recover all of the VAT charged on the sale. It is unclear how the market value rules will interact with these provisions however it is assumed that Revenue will not use the market value provision where an adjustment amount is payable under section 64(8). Be aware that an adjustment can arise under this section even if the sale of the property is at market value. The legislation does not provide an exception if the value of the property has fallen by virtue of adverse market conditions.
Refurbishments Carried Out by a Tenant This is actually a very common scenario that we will see as advisers. With every lease that is assigned or surrendered you have to be aware of whether the tenant has carried out any refurbishment(s) to the property. This is an area of particular risk to advisers. A refurbishment is a development of an existing property. Carry out refurbishment to an existing property creates capital good which is effectively the expenditure incurred on the refurbishment. This capital good is subject to the CGS in the same way as an acquisition or development of a property. Where a tenant with an occupational lease, carries out a refurbishment to the property and then assigns or surrenders the lease within ten years of carrying out that refurbishment, the tenant will have to pay back some of the VAT recovered on the refurbishment unless:
--The tenant who carried out the refurbishment was entitled to recover all of the VAT charged; --The tenant who carries out the refurbishment enters into a written agreement with the assignee/ landlord confirming that the landlord will take over the tenant’s responsibility in relation to the capital good created by the refurbishment; and --The tenant provides the assignee/landlord the capital good record for the refurbishment. If the tenant does not satisfy all of these conditions then the amount of VAT that has to be paid back is calculated using the same formula used to calculate the clawback when you make an exempt sale of the property. It is based on the number of years remaining in the adjustment period. When the tenant assigns or surrenders the lease it is effectively treated as making an exempt sale of the capital good created by the refurbishment.
The formula used to calculate the clawback is: B×N T
Where B is the VAT recovered on the refurbishment. N is the number of full intervals remaining in the adjustment period at the time of the assignment plus one. T is the total number of intervals in the adjustment period. It is important to remember when applying this formula that the number of
intervals
in
a
CGS
relating
to
a
refurbishment
is
10
and not 20. The written agreement referred to in s64(7) is built into the standard Law Society special condition 3 and if you are advising an assignee/landlord you should review that clause carefully before unwittingly agreeing to take over a capital good! Like so many of these liabilities this rule was introduced for anti-avoidance reasons and was designed to stop exempt entities carrying out expensive fit outs of properties without having to suffer irrecoverable VAT on the fit out costs. Without this provision the exempt entity could use a Special Purpose Company (SPC) to sign the lease, carry out the fit out, use the property for a VATable purpose for one day and then assign the developed property to its exempt associated company. As an assignment of a lease (other than a legacy lease) is not a supply of the property for VAT purposes, the SPC would not have to charge VAT on the assignment to the exempt entity. Because it is not making a sale of the property it would not face a clawback of the VAT paid on the fit out. As after the assignment it would not be using the property, it would have no further clawback under the CGS. Although it is designed to be an anti-avoidance measure, this provision will potentially catch a lot of innocent transactions where a business has taken a lease, done some development work on the property and unwittingly finds that it has created a capital good. Not only will it have to apply the CGS in respect of that work, it will have to be aware that it may crystallise a clawback if it assigns or surrenders the lease within 10 years of doing the work. Even in circumstances where the tenant had full VAT recovery on the refurbishment works, a clawback will still crystallise on the assignment or surrender unless the written agreement transferring the CGS obligation in respect of the refurbishment is in place. Very few assignees or indeed landlords would wish to take on a capital good created by an earlier tenant. Taking on a refurbishment as a capital good would
restrict how the assignee/landlord could use that property, in the future for example, if they put the property to an exempt use then they would face a clawback of the VAT that someone else had recovered. If a capital good is destroyed during the adjustment period then no further adjustments are made in respect of that capital good. The slate is wiped clean. Where the tenant who refurbishes a property rips out the capital good created by the refurbishment then it will not be required to carry out an adjustment on the assignment or surrender of its lease.
The Deemed Cancellation of the Waiver of Exemption It often seems that the waiver of exemption belongs to a different age. However it is still very much alive and something which the adviser must be aware when advising on property transactions. A particularly unusual scenario arises where you sell a property that had previously been let and the lettings in that property were subject to VAT on the basis that they were covered by the waiver of exemption. Even if the sale of the property is subject to VAT and the vendor has only ever used that property for taxable purposes, there can still be a clawback of part of the VAT recovered on the property. With falling property values that clawback can be quite significant. This clawback is contained in Section 97(12) of the VAT Consolidation Act.
It
provides that where you own or have an interest in a property on 3 June 2009 that is subject to a waiver of exemption then, on the date that you no longer have any interests in property that are subject to the waiver of exemption, your waiver will be treated as being cancelled. So after 2009 if you sell a property that is subject to the waiver you have to do the following three things: 1. Work out whether the sale is taxable or exempt. 2. Work out if you have a CGS adjustment. 3. If you no longer have a property that is subject to a waiver, your waiver will be cancelled and you will have to work out if you have to pay a cancellation sum. This is a particularly insidious provision, especially where you make a taxable supply. Generally where you make a taxable supply there is no clawback of VAT recovered. In this case, even if the sale is at market value to a third party and even if you have not had a letting in the property for many years, there can still be a liability. It is a
difficult liability to pick up as it is purely a matter for the vendor. It is not flagged in pre-contract enquiries or in VAT clauses. One has to wonder, if this was tested at EU level, would the court hold up such a provision. It is very difficult to see any vires in the EU Directive that would allow such an outcome. Sales by Receivers An ongoing unfortunate sign of the times is that many companies are going into either receivership or liquidation. Of course one of the principal assets to be disposed of is the business' property. Indeed with many developers going into liquidation, liquidators find themselves with a stock of properties, both complete and incomplete, that they have to sell. So how are sales by liquidators and receivers treated for VAT purposes? Firstly, sales by liquidators, receivers, mortgagee's in possession are all treated in the same way by Revenue. Bearing this in mind and for simplicity, from here on I am only going to refer to liquidators. The disposal of the property is deemed to be carried out in the course or furtherance of business by the person in liquidation. This is confirmed by section 22(3)(b). The liquidator is required to return the VAT arising on the sale to Revenue and must register for VAT in order to do this. In their Value Added Tax Information leaflet on Liquidators and Receivers issued in June 2009, Revenue set out their view of the VAT treatment of property transactions carried out by the liquidator as follows: "Since goods sold by a receiver or liquidator are deemed to be supplied by the company in receivership or liquidation, disposals of immovable goods which are assets of a company are deemed to be an economic activity and subject to the same rules as if the company had itself supplied the property. In other words the supply of freehold or freehold equivalent interests in “new” properties is subject to VAT. The joint option to tax can be availed of and the transitional rules, for properties which were taxable under the pre 1 July, 2008 VAT rules and which are supplied on or after that date, apply. The appropriate Capital Goods Scheme rules will also apply." Notwithstanding the above, there remained significant doubt as to whether a liquidator was entitled to opt to tax an exempt sale. Section 94(5) which contains the option to tax confirms that only a person who "supplies immovable goods" could opt
to tax a sale. In accordance with section 22(3) it is the business that supplies the immovable goods and not the liquidator. It is important that a sale by a liquidator can be opted as it affords the possibility of avoiding a clawback of previously recovered VAT arising on the sale of the property. It is more convenient if this option can be made by the liquidator. A change was introduced in Finance Act 2010 with a new section 94(7) to try to rectify this anomaly. Essentially Revenue wanted to ensure that if the sale of a property was exempt, the liquidator would be entitled to make a joint option to tax with the purchaser. The owner of the property (i.e. the person in liquidation) is not therefore required to make the joint option personally. The joint option will have to be in writing and will have to be made by the 15th day of the month following the month in which the sale takes place. The purchaser becomes the accountable person and has to self-account for the VAT arising on the sale. It is not possible to opt to tax if the purchaser is connected to the liquidator or to the owner of the property (irrespective of the level of VAT recovery of any party to the transaction). "Connected" has a very wide meaning for VAT purposes and I remain at a loss as to why the option to tax is not allowed to a connected purchaser. The option to tax for other sales is not restricted in this way and it seems unnecessarily harsh to apply the restriction for sales made by liquidators. The option to tax that a liquidator can make is available for exempt sales of freehold interests, and exempt surrenders and assignments of legacy leases. Where the property being sold by the liquidator is a residential property and the following conditions are met the sale will always be subject to VAT •
The company in liquidation developed the immovable goods or is connected to the developer; and
•
The company in liquidation was entitled to recover VAT on his acquisition or development of the properties.
Where a liquidator sells a property and the sale is exempt from VAT, and the option to tax is not exercised there may be a clawback of the VAT previously recovered by the owner under the CGS scheme. Revenue's view is that the liquidator is responsible for accounting for this VAT. This is because under section 19(3) the liquidator has to account for VAT becoming due "in relation to the disposal."
Revenue's view is that VAT repayable as a CGS Adjustment is VAT arising in relation to the disposal. The remainder of this presentation concerns RCT and the application of the new RCT system. I am indebted to my colleagues Alan Kilmartin and Fergus Finnegan for drafting the below. It is an article that has previously appeared in the Irish Tax Review. Fergus and Alan are our RCT specialists within Deloitte.
