75 / 262
VALUE ADDED TAX ON SALE
OF PROPERTY
VAT became part of the tax system on 1 November
1972. Solicitors are exempted from liability to register
and pay VAT on fees received for services rendered
in the course of their profession.
The tax applies to building construction including
the provision of new houses and other new buildings
and may also apply to sales of land and existing buil-
ding which have been the subject of development after
31/10/72.
Except in exceptional circumstances as provided for
in Section 4 (5) of the Value-Added Tax Act 1972
VAT does not apply to sales of undeveloped land or
sales of secondhand houses or other buildings. Even in
the case of developed land no liability will arise on sale
unless the person selling it has carried out some devel-
opment work such as demolition, extension, alteration
or construction on it after 31/10/72 or is deemed to be
caught under Section 4 (5) of the Act (disposal by
person other than the developer, e.g. a lessor granting
a lease to the builder's nominee).
A client who is a registered person i.e. who carries on
a business not exempted from VAT may be liable for
VAT on the sale of the premises. The effective rate is
3.156 per cent on the purchase price (5.26 per cent on
60 per cent of the total tax exclusive consideration).
He will be entitled to issue an invoice showing VAT
as a separate item. If the purchaser is himself a regis-
tered person he will be entitled to credit for the tax so
paid against VAT on his ordinary trading receipts.
If the purchaser who acquires the premises is not an
accountable person (e.g. a bank or an accountant) he
will have no means of recovering VAT paid to the
vendor as he will have no income chargeable to VAT.
Although solicitors are not accountable persons they
will no doubt be consulted by clients in the course of
selling or buying as to the impact of the tax. The main
relevant documents are : Value Added Tax Act 1972;
Value Added Tax Regulations 1972 (S.I. No. 177 of
1972); Guide to the Value Added Tax issued by the
Revenue Commissioners, particularly Chapter 20,
obtainable on application to Dublin Castle.
The client is the accountable person and where the
vendor is registered should be reminded of his liability
to account for the tax which he can pass on to the
purchaser. The purchaser in turn should be reminded
of his liability to pay the tax to the vendor and his right
to obtain an invoice which may be used to obtain a
tax credit if he is registered.
Example 1
Sale after 31/10/72 of new property in respect of
which there has been no development after 31/10/72
—No VAT liability on vendor or purchaser. Wholesale
tax and turnover tax will have been paid on the com-
ponent materials—Section 35.
Example 2
Sale not in the course of business of any premises
even where there has been development after 31/10/72
—No VAT liability on vendor or purchaser.
("Course of business' is a wide term. A multiple
trading group selling off a branch developed after
31/10/72 would be liable to VAT as credit could have
been claimed on VAT suffered on development. Such
a sale would be in course of business.)
Example
3
It may be arranged in the contract that the price of
premises subject to VAT shall be tax-inclusive.
Sale by builder of house newly built or developed
after 31/10/72
£10,000
(Tax included in £1,000 equals £305.90.)
Tax-exclusive price
£9,694.10
Add VAT at 3.156 per cent
£305.90
Total payable on completion
£10,000.00
In this case the purchaser of the house as a residence
will receive no tax credit. On a subsequent sale by an
unregistered person there will be no further liability for
VAT but in the case of business premises if the pur-
chaser is an accountable person under Section 8 i.e. a
person engaged in the delivery of taxable goods or ser-
vices and the premises are acquired for that purpose he
will be entitled to an invoice for tax included in the
price i.e. £305.90 and will be entitled to a tax credit for
the amount shown on the invoice against VAT on his
trading receipts.
Building contracts which straddle 31/10/72 present
special problems and members should refer to Section
35 of the Act which contains provisions for adjustment
and recovery of consideration in such cases.
The tax on housing under VAT is estimated to be
the same as under the previous system of turnover and
wholesale tax. If, therefore, a price for the erection of a
house has been agreed before November 1st there would
normally be no case for an adjustment of the price
merely because some of the payments were received by
the builder after November 1st. In fixing the price of a
new house after November 1st, it would be most desir-
able to make quite clear whether the price is inclusive
of VAT or whether it is a tax-exclusive amount to
which an appropriate addition for VAT may be made
later on.
In general it is thought that it will simplify matters
to make VAT sales of property at tax-inclusive prices
so that VAT will be regarded as included in the pur-
chase price.
VAT may also arise on the creation of rents on their
capitalised values whether in respect of developed land
or new office or shop buildings where the lease is for
more than ten years.
It is important to realise that on a sale of property
chareable with VAT where there has been a partial
development e.g. a garage worth £100,000 with a
development-worth e.g. £2,000 the whole consideration
£102,000 will attract VAT. The purchaser who re-
ceives an invoice for the VAT charged will be entitled
to a tax credit for the VAT charged against his subse-
quent trading receipts.
It is suggested that the following among the pre-
contract enquiries should be made by the solicitor for
the purchaser of property.
74