Munster’s first independent VAT consultancy practice providing specialist VAT and Indirect tax advisory, assurance and interim management support services to owner managed businesses, small & medium enterprises, accountants and legal practices.

Property update: Putting the cart before the horse does not get you to the market!

Tuesday, February 28, 2012

by Nick Ryan

Looking at the last quarter there has been a marked increase in property transactions arising from business restructuring, receiverships, Nama and business closure. Although these circumstances all drive different issues in dealing with the transaction there are some clear common denominators for all.
In some ways the new rules have, as was intended, simplified the VAT treatment of transactions in property though in some respects they have provided for confusion in how the VAT treatment is determined. Overall, it seems that we just can’t get our heads around how the new rules address property transactions involving pre 2008 properties. Also, the application and use of the VAT special conditions clauses are proving to be a nightmare for many with a “select all” fallback being the common approach.
For some transactions the use of the property has become intertwined with the steps required to determine the VAT treatment of a sale. With others, it is often likely that the administrative requirements for managing some property transactions such as surrenders and assignments have been ignored. I will not mention the management of the Capital Goods scheme!
Also, of major concern, is that VAT advice is largely being sought after the fact, if at all, which can provide for major problems whether this is because the cost for this advice is deemed to be too high is difficult to say. From our perspective, any advice has to be value driven and reflective of the input provided though never at the detriment of the transaction itself. From experience in recent transactions where advice was provided after the fact it has generally been found that the VAT treatment applied has been found to be incorrect which has resulted in, in some cases:
• A claw back in VAT to Revenue by the vendor
• For the sale contract to be changed to incorporate the revised treatment and the appropriate VAT special conditions clauses and,
• The price renegotiated to the benefit of the purchaser for managing these errors.
In one case this mistake resulted in the vendor losing a significant amount of the sale proceeds in order to manage the VAT claw back adjustment as the sale was concluded to be VAT exempt sale of an old building. The purchaser declined the proposal for the joint option to tax not because they felt it a disadvantage to them but because the vendor got the position so wrong which resulted in further legal and other professional costs in finalising matters for a second time.
Under the new rules the VAT position for a disposal of a property becomes more of a deal maker/deal breaker requiring flexibility and good negotiating skills by both parties in both securing the best VAT position for vendor and purchaser. What is clear is that once it has been agreed to dispose of a property, or acquire one, there is a need to have concrete clarification as to the VAT treatment to be applied, where the VAT treatment concluded is of a detrimental position for either party then what options can be considered to minimise these and thereby complete the transaction and, know what VAT special condition clauses should be included if any. This comfort and security can be provided without the fear of incurring high, and at times, unknown costs and this is essential if the sale proceeds are to be maximised and costs are kept to a minimum. From experience property transactions go a lot more smoothly if the VAT position has been outlined at the start and both parties are of acceptance of it.
The VAT Practice is aware of the complexities involved in managing these arrangements and offer a fixed fee advisory service for property disposal/acquisitions which provides the client with, not only an appraisal of the VAT treatment of the transaction but also recommendations for steps required to complete the transaction and minimise the impact of VAT, clarification on the impact of the Capital Goods Scheme, assistance with the management of the pre contract enquiries and confirmation on which, if any, VAT special conditions are to be included within the Contract for Sale. Overall the service is there to assist in the smooth and efficient completion of property transactions and provides for an opinion that can be relied upon thereby avoiding any post transaction issues.
If you have any questions on VAT and property transactions or would like to utilise our fixed fee service then please contact Nick at the VAT Practice or 0238838181 or advice@thevatpractice.ie.

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