VAT on Property


With effect from 1 July 2008 new rules were introduced in relation to VAT on property.  Below is a brief summary of these rules.

Supply of property

Under the new rules, in order for the supply of a property to come within the charge to VAT the property must have been developed and must be supplied for consideration in the course of business.

The supply of a completed property is taxable only while the property is considered new.  A property will be considered new on:

  • The first supply of a completed property within five years of its completion
  • The second and subsequent supply of a property if it occurs within two years of occupation

The supply of an “old” property is exempt from VAT however both parties may jointly opt to have the supply subject to VAT.

However, it should be noted that VAT will always be chargeable on the supply of a residential property by a developer/builder.

Also, the supply of property in connection with an agreement to develop the property will always be subject to VAT.

Letting of property

Under the new rules letting of property is exempt from VAT.  However the landlord may exercise an option to apply VAT to a letting.  If a landlord wishes to exercise his option to tax he must either; obtain the agreement of the tenant in writing, or issue a document to the tenant stating that the letting will be taxable.

The option to tax cannot be exercised in the following circumstances:

  • Letting of a residential property
  • Letting between connected parties

Where an option to tax is terminated there may be implications under the Capital Goods Scheme.

Capital goods scheme (CGS)

This is a new idea introduced with effect from 1 July 2008.  The aim of the CGS is to take account of changes in the use of a property over its “VAT life”. The “VAT life” of a property is generally twenty years.

The exempt supply of an “old” property during its “VAT life” will result in a clawback of VAT.  This can be avoided by exercising the joint option to charge VAT.

All new properties developed on or after 1 July 2008 or properties refurbished on or after 1 July 2008 must have a “capital good record”. This record will contain information such as how must VAT was deducted on acquisition, details of any CGS adjustments, etc.

Transitional rules

There are transitional rules in place to deal with the supply of properties which were taxable under the old rules and which are supplied on or after 1 July 2008.  Where the person making the supply was not entitled to deduct VAT on the acquisition, the supply of the property on or after 1 July 2008 is exempt from VAT.  However the seller and the purchase may jointly opt to tax the supply.

There are also special rules for dealing with leases for a period of 10 years or more which are assigned or surrendered on or after 1 July 2008.  In such cases, the question of whether a liability to VAT arises will depend of whether the tenant was entitled to deduct VAT on the acquisition of the lease.  If the tenant was entitled to deduct VAT then the supply is subject to VAT, if not, then the supply is exempt.  In the case of an exempt supply both parties may jointly opt to apply VAT to the assignment or surrender.