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Finance Bill 2008

VAT CHANGES 

A Bill for Bishops, Brickies and a Landlord or Two 

Finance Bill 2008 was published earlier today and the following key VAT changes were introduced. As was known to one and all, a complete new VAT and property regime comes into force on 1 July 2008. 

But there is more to VAT than property and in this regard, I have also highlighted the more important changes to the legislation. There are some minor technical adjustments on which we have not commented. 

In summary, and in addition to the fundamental reform of VAT on property, the key changes include a reverse charge basis for accounting for VAT for main contractors on certain construction services received from sub-contractors, changes in VAT rating for a small number of products, a new VAT charge on business property being used for private purposes, new rules for traders accounting for VAT on the cash receipts basis, accounting for VAT on deposits, a clever new way to get your car seized, higher penalties for certain offences and new Revenue Powers to allow bored Tax Inspectors get a bit of craic out of sitting in on Garda interviews. 

In all, the VAT changes run to nearly 40 pages in the Bill; making this exercise a challenging one for the writer. However, the writer is consoled in the knowledge that the VAT on property simplification measures are not likely to put VAT consultants out of business, as had been predicted in some quarters. “Simplification”, as an EU official once put it, clearly means making things not quite as complicated as they could have been made.

Should you have any queries relating to the implications or changes outlined below, please do not hesitate to contact us.

VAT & Property 

Amendment

The amendments in this area are far too numerous for the scope of this summary bulletin, so the key changes are summarised as follows:

• No changes to residential property rules. New homes remain taxable at 13.5%. No option to tax residential lettings.
• Sales of new non-residential properties taxable at 13.5%. New means less than 5 years old, or less than two years old if the property is being disposed of a second (or more) time since completion.
• Sales of second hand (not new) properties to be exempt – option to tax available. 
• All leases exempt except for owner-type leases (eg 999 year leases).These are to be regarded as freeholds.
• No distinction between long/short leases.
• Option to tax leases at landlord’s behest (21%), but NOT where landlord and tenant are connected and tenant does not have full VAT recovery.
• Draconian anti-avoidance rules.
• Effective retrospective taxation of existing leases between connected persons where an existing waiver is in place.
• Introduction of Capital Goods Scheme – complex legislation.
• New rules applying on surrenders and assignments included in complicated transitional arrangements.
• Many other minor changes.

Implications

The changes are fundamental and far-reaching and any landlord who has an existing waiver of exemption in place needs to assess without delay whether it is sensible to retain the waiver in place beyond 1 July 2008. Organisations who have a landlord/tenant relationship between connected entities are likely to face significant VAT costs come 1 July if they cannot continue with a waiver/option to tax.

This is yet another blow by Revenue and the Department of Finance to the Charity/Not for Profit sector. Last year, they attacked healthy eating; this year it is charities. What is in store for 2009? VAT at 21% on nursing home charges?

Needless to say, the major changes to commercial leases will mean that landlords and tenants who will enter into agreements which will be affected by these changes need to consider their position carefully and ensure that VAT clauses in lease contracts are not detrimental to their financial well-being.

Reverse Charge for Main Contractors 

Amendment

This is an interesting change, cleverly designed to cause carnage in the normally sedate world of a builder’s accounts. From 1 September 2008, sub-contractors supplying taxable services to main contractors will no longer charge VAT on their services. Instead, the main contractor will self-account for the VAT under the reverse charge mechanism and take a deduction for that VAT, if he is so entitled. The legislation has to be read in conjunction with Sections 530 and 531 of the TCA 1997 which define the roles of main contractors and sub-contractors. Hauliers seem to be excluded from the new rules and the rules do not seem to extend to main contractors engaged in meat or wood processing.

Implications

Consternation at the lower end of the construction industry can be widely expected. Explaining the finer points of the reverse charge procedure to important people in financial institutions is often fraught with difficulty. I am not suggesting that the person engaged to paint the toilet block is not an important person, but (s)he may have an alternative interpretation for a reverse charge. 

Private Use for Business Premises 

Amendment

If a business obtained a VAT deduction for the acquisition or development of its business premises, and subsequently it diverts all or part of that premises to a private use, it is regarded as making a supply of a service and new rules are being introduced to determine how the VAT liability on that service is to be calculated.

Implications

This is really a kind of self-supply, in old VAT parlance. It seems reasonable that a clawback of sorts would arise where a business asset is diverted to private use.

Cash Basis of Accounting for VAT 

Amendment

A person authorised to account for VAT on the cash receipts basis (mainly small businesses with annual turnover of <€1m per annum) must issue a credit note for the difference where they agree a discount with a debtor after the issue of the VAT invoice. Otherwise, they can be held liable for the full VAT amount on the original invoice. Presumably, this measure is to ensure that the VAT returned by the supplier matches the VAT recovered by the customer.

Implications

The obvious implication here is that failure to issue the credit note means that the supplier will have to pay more VAT than he should.

Deposits Received 

Amendment

This is a change consequential on an ECJ ruling. Where a person receives a deposit, and the customer subsequently withdraws from the transaction but does not get a refund of the deposit, the supplier is entitled to reverse the VAT he would have accounted for at the time the deposit was received, and recover it through his VAT return. This is because, although he received money, he did not make any supply to the person who withdrew from the transaction. If there is no supply of goods or services, there can be no charge to VAT.

Implications

There may be possibilities here for people who have accounted for VAT down the years on non-refundable deposits to make retrospective refund claims in relation to “no shows” or cancellations.

“Have Your Car Seized” Scheme 

Amendment

Where a private individual brings in a new car from another EU Member State, they are obliged to pay VAT on the Intra Community Acquisition of the car. Readers will not be surprised to learn that this can amount to a substantial amount of money.

In future, failure to pay this VAT can lead to Revenue seizing the car.

Implications

Rather obvious, I would have thought.

Joining the Guards 

Amendment

A curious new Revenue Power has sneaked in via Section 124 of the Bill. Basically, it allows up to two Revenue officials sit in on a Garda interview of a person suspected of certain VAT (among others) offences. 

Implications

Yet another Revenue Power to be consigned to gather dust on the shelves.

VAT Rates 

Amendment

The lower VAT rate of 13.5% will apply to the agricultural production of bio-fuel. But the headline writers will fasten on to something else.

You can bet that the Legion of Mary will be marching tonight. I can smell already the gagging scent of candle wax as they make their way up Clanbrassil Street.

Save us all – the rate of VAT on condoms is to be reduced to 13.5%.

Implications

Your guess is as good as mine!

Summary

As usual, a pot pourri of changes in the VAT pages of the Finance Bill. A range of issues from new and complex property rules to lower VAT on condoms. We can be assured, in the VAT world, of a rough ride ahead but at least it should be a safe journey!

I hope that some of the foregoing will be of assistance to you. If any of the proposed amendments are likely to affect you or any of your clients, now is the time to make representations to the appropriate quarter. 

If any significant amendments arise at any stage prior to enactment, we will let you know.

Kind regards, 


Dermot O’Brien
31st January 2008

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