A new interpretation by the Revenue of the VAT law on the sale of long-lease commercial properties will leave owners liable to VAT at 12.5 per cent on the sale, if the property is developed after the lease has been created.
Until now, such transactions were not chargeable to VAT.
The new interpretation applies only to properties leased for a period of more than 10 years - most major commercial leases would be in the order of 25 years - and it only applies where the building is developed after the lease has been granted.
However, under VAT law, the modification of a building for a new computer system, for example, would be considered as development.
Although this has been the legal position since 1997, it was not enforced. This latest interpretation was decided only last week.
It is understood that nobody has yet been subject to the new interpretation.
"If VAT is going to be charged at 12.5 per cent, that is going to have its impact on property sales because there is now an unrecoverable VAT charge," says Mr Fergus Gannon, director of VAT services with Deloitte & Touche in Dublin.
"The strict letter of the law is now being applied. It gets complicated because the fundamental principles of VAT would suggest that it should be otherwise."
Mr Gannon says the contradiction is that creating a lease is deemed a sale for VAT purposes; the subsequent sale by the owner of the property, with the tenant, is also a sale. Under VAT law, one is selling the same building twice.
"A property could be sold for millions of pounds. It will be a general matter of concern for people who develop properties, let them and then sell the tenanted property. If somebody has a big enough property transaction, I'm sure they will be testing it," he says.
Mr Gannon says that the Revenue has told him it may reconsider the position in the light of individual cases put to them.
Up to 1997, the sale of a building after the lease was created was not chargeable to VAT. "There wasn't any legislative basis but it was the practice," Mr Gannon says.
Then the law was changed, with the wording stating that if the property were not developed once the original lease was created, then there would be no VAT on the sale.
"I raised it with the Revenue some years back and they said, in practice, you needn't worry," he recalls. He says the issue was raised again last December and the Revenue asked for time to give a definitive reply.
"They have looked again and they say it's the law."
Many developers of large properties develop a "cement box" - a bare property. They then look for a good tenant, such as a bank, who will take a 25-year lease. The building, with the tenant, is then a much more valuable proposition.
A developer can recover the VAT he was charged on the development cost of the building and charge the bank or other tenant a once-off lump sum of VAT on the creation of the lease.
If the tenant then develops the building and the original developer sells the property afterwards, he has to charge the purchaser VAT at 12.5 per cent on the sale price. This VAT is not recoverable by the purchaser.
