There have been many changes in the world of VAT over the past year, including the following:

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1 There have been many changes in the world of VAT over the past year, including the following: Changes to the VAT on property legislation Draft Consolidated VAT Act ECJ case law including Swiss Re relating to the insurance industry, Commission V Ireland relating to public bodies/local authorities and AB SKF relating to share transactions Travel agents margin scheme Eight directive reclaim procedures NAMA Decrease in standard VAT rate Place of supply of services rules VIES for services Finance Act 2010 Margin scheme for second hand cars Changes in Revenue practice New and updated Revenue publications in relation to aspects of VAT on property, bad debt relief, etc. It would be impossible to cover, even at a very high level, all that has happened in VAT over the past year today. Thus, with this in mind, I will focus on four areas that are of considerable relevance to practitioners. That is not to say that any issue not addressed is of less importance. A choice just had to be made. 1

2 These are the four topical areas I will discuss: Place of Supply of Services Rules Local Authorities and VAT VAT on Property NAMA, VAT Contract Clauses and VAT Pre-Contract Enquiries Margin Scheme Cars Place of Supply Rules - Cross Border Supply of Services Introduction Jan 1 st 2010 saw the coming into effect of the European Communities (Value-Added Tax) Regulations S.I No.250 of 2009, which have amended the Value Added Tax Act This was to introduce the revised EU legislation in relation to the rules governing the supply of services for VAT purposes. These regulations cover a number of areas, but it is the changes as regards the supply of services and VIES statements in relation to service supplies that are the focus of this paper. By way of background, it should be noted that the changes to the place of supply of service rules are to be implemented over a period of five years, but the focus here is on those which came into effect on Jan 1 st General Rules Previously, the general rule for the place of taxation of cross border supplies of services was that the services were chargeable to VAT in the country where the supplier was established (be that EU or non-eu) subject to a range of exceptions and exemptions. The main batch of exceptions to this, with which most will be familiar, were those found in the Fourth Schedule to the VAT Act tax, legal, consultancy, IT, etc. Fourth Schedule services acquired for business purposes were chargeable to VAT in the EU Member State [MS] where the customer was established, on a reverse charge basis by the VAT registered recipient. Other exceptions included services connected with immovable goods which were chargeable to VAT where the immovable goods were situate. 2

3 Since Jan 1 st 2010 the general applicable rule for services supplied on a Business to Business [B2B] basis is that the service is chargeable to VAT in the place where the recipient is established VAT being dealt with on the reverse charge basis. However, as before, there are exceptions and exemptions to this general rule, and these exceptions will be commented on below in some more detail. As before, services remain to be subject to VAT in the supplier s country where the recipient is not in business for VAT purposes e.g. a private individual B2C supplies. Again, there are some exceptions to this which will be commented on below in some more detail. Thus, in summary, where services are governed by the general rules the position is as follows: Service supplier in Ireland Irish customer Chargeable to VAT in Ireland EU business customer Reverse charge VAT in EU customer MS EU non-business consumer Chargeable to Irish VAT Non-EU business customer Not chargeable to Irish VAT Non-EU non-business consumer Depends on nature of service. May or may not be chargeable to Irish VAT (See below) Service purchaser/customer in Ireland EU supplier to business customer Chargeable to Irish VAT on the reverse charge basis EU supplier to non-business consumer Chargeable to VAT in other MS Non-EU supplier to business customer Chargeable to Irish VAT on the reverse charge basis EU supplier to non-business consumer Depends on nature of service. May or may not be chargeable to Irish VAT (See below) 3

4 Exceptions to the General Rules I will now turn to the exceptions to the general rules, of which there are a number. These exceptions generally link the place of supply and chargeability to VAT to where the service is physically performed. In this context many MS have in place reverse charge arrangements whereby the business customer will account for any VAT chargeable on the reverse charge basis. However, in the absence of such specific provisions a supplier may be required to register and account for VAT in the MS where the supply takes place for VAT purposes. Services Connected With Immovable Goods/Property The place of supply is where the property is situate. Revenue, in their guidance notes, and the Regulations indicate that a supply of services connected with immovable goods includes the following a supply of services by experts or estate agents, a provision of accommodation in a hotel or guesthouse or in an establishment having a similar function, or in a holiday camp or a site developed for use as a camping site and a supply of services involving the preparation and co-ordination of construction work (including a supply of services of architects and of persons who provide on-site supervision). Clearly this still leaves considerable room for some doubt and care should be taken in this area. Reverse charge procedures have been put in place in respect of such services, with the exception of holiday accommodation and construction services. Where a business customer established in Ireland acquires such services from a supplier who is established outside Ireland, the business customer is required to account for Irish VAT on these services on the reverse charge basis. 4

5 Restaurant and Catering Services For restaurant and catering services the place of supply is in the MS where the services are physically carried out, and the rule applies equally to supplies to both business customers and non-business customers/consumers. The cross border supply issues might best be illustrated by way of example. Where a catering service supplier from another MS supplies a catering service in Ireland the service supplier is required to register and account for Irish VAT on such supplies in Ireland. Where an Irish catering service supplier provides catering services in another MS, the Irish supplier is required to register and account for VAT on those services in that other MS. Restaurant and Catering Services for Consumption on Board Ships, Planes and Trains The place of supply of restaurant and catering services for consumption on board ships, planes and trains during part of a transport within the EU will be the place of departure, which effectively mirrors the rules for supplies of goods for consumption on board such transport. Hiring-Out of Means of Transport The place of supply for the short-term hiring of a means of transport is where the means of transport is actually put at the disposal of the customer. In this context, short-term hire means a period of up to thirty days for means of transport such as cars, vans, etc. and up to ninety days for vessels. Revenue have indicated that a means of transport is considered as "actually put at the disposal of the customer" at the place where the means of transport is situated when the customer actually takes physical possession of it, and that legal control (signature of contract, taking possession of the keys) is not of itself sufficient to determine the place where the means of transport is put at the disposal of the customer. 5

6 In this context, it should be noted that the place of supply of long-term hiring out of a means of transport for both B2B and B2C supplies are governed by the general rules. Intra-Community Transport of Goods The general rule will apply to B2B intra-community transport of goods; there has been no change. The place of supply is where the customer is established. As regards B2C intra-community transport of goods, there has been no change. The place of supply is the place of departure. Supply of Intermediary Services The place of supply of services B2B by an intermediary acting in the name and on behalf of another person is the place where the business customer is established. This rule has changed the place of supply from where the underlying transaction was supplied to where the business customer is established. The place of supply of services to a consumer by an intermediary acting in the name and on behalf of the consumer is the place where the underlying transaction is supplied. There is no change to this rule. Cultural, Artistic, Sporting, Scientific, Educational, Entertainment or Similar Services The place of supply is where the services are physically carried out, with no change since Jan 1 st Ancillary Transport Services, Valuations Work and Work on Movable Goods The new general rule applies for B2B supplies. As regards B2C supplies, there has in effect been no change with the place of supply being where the services are physically carried out. 6

7 Passenger Transport Services For both B2B and B2C supplies, there has been no change, with the place of supply being where the passenger transport takes place. B2C Supplies to Customers Outside the EU With regard to B2C supplies by Irish suppliers to non-eu consumers, it is the nature of the service which determines whether the supply is chargeable to Irish VAT under the general rule or is not chargeable to Irish VAT. Irish VAT is not chargeable on the following services supplied to non-eu consumers (unless the service is connected with property): transfers and assignments of copyrights, patents, licences, trademarks and similar rights advertising services the services of consultants, engineers, consultancy firms, lawyers, accountants and other similar services, as well as data processing and the provision of information obligations to refrain from pursuing or exercising, in whole or in part, a business activity or a right banking, financial and insurance transactions including reinsurance, with the exception of the hire of safes the supply of staff the hiring out of movable tangible property, with the exception of all means of transport the provision of access to, and of transport or transmission through, natural gas and electricity distribution systems and the provision of other services directly linked thereto telecommunications services radio and television broadcasting services electronically supplied services 7

8 Services not included in this list are subject to Irish VAT at the appropriate rate. For these services to be supplied free of VAT, the supplier will need to provide proof that the customer is established outside the Community. The supplier must obtain the necessary information from the customer and verify the accuracy of that information via existing security procedures, such as credit card pre-authorisation checks which verify that an address is associated with a card number. If a B2C supply made from the State is wrongly identified as being made to a person outside the Community when it was an intra-community supply, the supplier may be liable for Irish VAT and may incur interest and penalties in the event of a Revenue audit. Use and Enjoyment Provisions The specific use and enjoyment rules already in place under the provisions of the VAT Act prior to Jan 1 st 2010 have continued to operate under the new place of supply of services regime. In summary, these are as follows: Hire out of means of transport - The place of supply of this service provided from Ireland but effectively used and enjoyed outside the EU is deemed to be outside the EU. The place of supply of services provided by persons established outside the EU but which are effectively used and enjoyed in Ireland is deemed to be Ireland. Such services include the following: The hiring of movable goods Telecommunications services, telephone cards, radio or television broadcasting services when supplied to private individuals Banking, financial and insurance services, including reinsurance and financial fund management (but excluding the provision of safe deposit facilities) when supplied to private individuals Money transfer services supplied to persons in the State by an intermediary on behalf of a principal established outside the EU 8

9 Obligations for an Irish Business Service Supplier Identification for B2B Supplies - It is a matter of fact whether the customer is a business or not. Suppliers to a business in another MS should obtain the customer s VAT number for invoicing and record purposes. Where the recipient of the service has not yet have received a VAT number from the tax authority in the relevant MS but is in business the supplier should request that the customer provide an alternative tax identification number or a letter from the tax authorities in its MS confirming that it is a business. As regards supplies to a business outside the EU, in addition to proof as to the place of establishment of the customer outside the EU, the supplier must also furnish proof that the customer is a business. The supplier should obtain sufficient evidence from the customer to show that the customer is in business, which may consist of a VAT/GST number, a business ID number, a number allocated by the tax authorities of the country of the customer s establishment or other relevant data. Identification for B2C Supplies - For the supply of VAT free services to consumers outside the EU, the supplier should obtain and retain evidence that the customer is established outside the EU. This might involve verifying the accuracy of that evidence via existing security procedures, such as credit card pre-authorisation checks, etc. and penalties in the event of a Revenue audit. VAT Information Exchange System VIES With effect from Jan 1 st 2010 Irish VAT registered suppliers must submit a VIES return detailing all the VAT registered customers in other MS to whom they have supplied services in respect of which the customer is liable to account for the VAT chargeable. A business may submit VIES returns on a quarterly or monthly basis. This is an antiavoidance tool to ensure that EU service recipients self-account for VAT on EU sourced vatable services. 9

10 The problem here is that local differences and derogations could mean that the EU purchaser does or does not have an obligation to pay local VAT on a reverse charge basis on receipt of an Irish service. Is the Irish supplier now expected to be acquainted with the laws and practices in each of the other 26 MS? Revenue s advice is where there is any doubt, to treat the supply as though the recipient does have a local VAT obligation and declare the service in the VIES return accordingly. Service Purchaser A business in Ireland which acquires vatable services from overseas is required to register and account for Irish VAT in relation to same. 10

11 VAT 60A Procedure The VAT 60A procedure allowed a supplier to zero rate the supplies of non-fourth Schedule services to specified business customers established outside Ireland, where VAT would have normally been chargeable, and refundable to the business customer under the provisions of the EC 8 th or 13 th Directives (the foreign VAT refund scheme). When the VAT 60B authorisation is issued by Revenue, and presented to the Irish supplier, the Irish supplier can apply the zero VAT rate to subsequent supplies of services to that foreign customer (although the legislative basis for this is unclear at best). Since Jan 1 st 2010 the majority of B2B service supplies to overseas customers are no longer subject to Irish VAT. However a limited number of services, while supplied to B2B abroad, will continue to be subject to Irish VAT. In such cases, the VAT 60A/B procedure still applies where the necessary requirements are met. Local Authorities and VAT Finance Act 2010 has introduced major changes in the treatment of State, public bodies and local authorities for VAT purposes. I intend to focus on the changes that impact on local authorities. The changes are the result of a number of judgments issued by the European Court of Justice, culminating in the judgment given in Commission v Ireland [C-554/07, 16 July 2009]. In this case the ECJ ruled that the Irish VAT treatment of local authorities and public bodies was contrary to European VAT law. The authorities have now sought to remedy this breach by amending the Value Added Tax Act, 1972 [VAT Act] via the Finance Act Background Article 13(1) of the 2006/112/EC states that States, regional and local government authorities and other bodies governed by public law shall not be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities. 11

12 In effect this means that, with the exception of certain activities, public bodies are not regarded as taxable persons in relation to activities in which they engage as public authorities. In other words, the activities of public bodies are taxable unless they carry out those activities in fulfillment of their functions as a public authority. Article 13(1) goes on to state that However, when they engage in such activities or transactions, they shall be regarded as taxable persons in respect of those activities or transactions where their treatment as non-taxable persons would lead to significant distortions of competition. This is very different from the historic provisions of the VAT Act dealing with local authorities. Sections 8(2A) and 8(3E) allow the Minister for Finance, by way of Ministerial Order, and the Revenue Commissioners, by way of determination, to deem local authorities to be in business in certain circumstances and provide that, in the absence of any such Order or determination, the local authorities are not in business. Commission v Ireland Case The judgment in the ECJ case of Commission of the European Communities v Ireland C- 554/07 was published on 16 July This was an important case from an Irish VAT perspective as it has impacted, via new VAT legislation, on the State, local authorities and other bodies governed by public law. The case arose from a complaint made to the European Commission in relation to the operation of off-street car-parking facilities by local authorities, which was not subject to VAT, whilst VAT was applicable to such car parks operated by private operators. It was argued that Ireland had failed to fulfill its obligations under the 6th Directive (Article 4(5)), which allowed public bodies not to be treated as taxable persons in respect of activities in which they engage as public authorities, but that they should be treated as taxable persons, where they engage in economic activities outside their public authority realm or where the treatment as non-taxable persons would lead to a significant distortion of competition or in respect of Annex D activities. 12

13 The Commission argued three points: [1] The lack of any general provision requiring the taxation of economic activities in which bodies governed by public law engage otherwise than in their capacity as a public authority. The court held in relation to this complaint that Ireland cannot effectively secure the correct application of relevant EU law as it failed to lay down in its legislation a general requirement that economic activities in which bodies governed by public law engage otherwise than in their capacity as a public authority are to be subject to VAT. [2] The lack of any general provision requiring bodies governed by public law acting in their capacity as a public authority to be treated as taxable persons where their treatment as non-taxable persons could give rise to significant distortions of competition. The court again held that Ireland did not effectively secure the correct application of relevant EU law as its legislation did not contain either a general requirement that bodies governed by public law acting in their capacity as a public authority are to be subject to VAT where their treatment as non-taxable persons gives rise to significant distortions of competition or any criterion providing a framework for the exercise of the Minister for Finance s discretion. [3] The lack of any general provision requiring bodies governed by public law engaged in activities listed in Annex I of the Recast Directive (Annex D, Sixth Directive) to be treated as taxable persons. In this regard, it was held that Ireland did not correctly transpose Article 13 because its legislation did not contain a general requirement that bodies governed by public law engaged in activities listed in Annex I are liable to VAT, provided that those activities are not carried out on such a small scale as to be negligible. In the judgment the ECJ stated, as it had in previous cases, that two conditions must be fulfilled in order for a transaction to fall outside the scope of VAT, being [1] the activities must be carried out by a body governed by public law, and [2] the activities must be carried out by that body acting as a public authority. What is also of considerable relevance is the idea of distortion of competition. The second paragraph of Article 13(1) will only apply so as to make an otherwise non-taxable activity taxable if retaining a non-taxable treatment leads to, or would lead to, significant 13

14 distortion of competition. In this context the word significant is understood to mean that the treatment of public bodies as non-taxable persons can be permitted only in cases where it would lead only to negligible distortions of competition. Whether non-taxation would lead to significant distortion of competition must be evaluated by reference to the activity in question, as such, without such evaluation relating to any local market in particular. The expression would lead to is to be interpreted as encompassing not only actual competition but also potential competition, provided that the possibility of a private operator entering the relevant market is real and not purely hypothetical. Thus, following from the relevant case law and such analysis, the activities of the State and local authorities had to be examined to see where Ireland was positioned. The result of this is the new VAT legislation. For public bodies and local authorities this will be an ongoing issue. They will need to establish whether their activities are outside the scope of VAT as being carried out in pursuance of the body s public authority function or not. However, even if an activity is outside the scope of VAT on this basis, that activity can come within the scope of VAT if non-taxation would lead to a distortion of competition. Legislation Section 117 of the Finance Act has amended Sections 8(2A) and (3E) of the VAT Act. Section 8(2A) previously read as follows: (a) The Minister may, following such consultations as he may deem appropriate, by order provide that the State and every local authority shall be accountable persons with respect to specified categories of supplies made by them of goods or services and, accordingly, during the continuance in force of any such order but not otherwise, the State and every local authority shall be accountable for and liable to pay tax in respect of any such supplies made by them as if the supplies had been made in the course of business. 14

15 Provided that, where supplies of the kind referred to in, subject to subsection (3E), paragraph (xxiii) of the First Schedule or in paragraph (viic) of the Sixth Schedule are provided by the State or by a local authority, an order under this subsection shall be deemed to have been made in respect of such supplies by the State or by the local authority. (b) The Minister may by order amend or revoke an order under this subsection, including an order under this paragraph. (c) An order under this subsection shall be laid before Dáil Éireann as soon as may be after it is made and, if a resolution annulling the order is passed by Dáil Éireann within the next twenty-one days on which Dáil Éireann has sat after the order is laid before it, the order shall be annulled accordingly, but without prejudice to the validity of anything previously done thereunder. Section 8(2A) of the VAT Act has been amended to read as follows: Notwithstanding section 2, the State or any public body shall not be treated as a taxable person acting in that capacity in respect of any activity or transaction that is carried out by it in, or is closely linked to, the exercise by the State or such public body of particular rights or powers conferred on it by any enactment, except where - (a) that activity is listed in Annex I (which is set out in Schedule 7) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, and is carried out by the State or that public body on a more than negligible scale, or (b) not treating the State or that public body as a taxable person in respect of that activity or transaction creates or would likely create a significant distortion of competition. Section 8(3E) of the VAT Act previously read as follows: (a) Notwithstanding the provisions of section 6(1) and of subsection (1), and subject to the provisions of subsection (3), where- (i) a person supplies services which are exempt in accordance with section 6 and paragraph (xxiii) of the First Schedule, or 15

16 (ii) the State or a local authority supplies services of the kind referred to in paragraph (xxiii) of the First Schedule, then an authorised officer of the Revenue Commissioners shall- (I) where such officer is satisfied that such supply of such services has created or is likely to create a distortion of competition such as to place at a disadvantage a commercial enterprise which is an accountable person supplying similar-type services, or (II) where such officer is satisfied that such supply of such services is managed or administered by or on behalf of another person who has a direct or indirect beneficial interest, either directly or through an intermediary, in the supply of such services, make a determination in relation to some or all of such supplies as specified in that determination deeming (A) such person, the State or such local authority to be supplying such supplies as specified in that determination in the course or furtherance of business, (B) such person, the State or such local authority to be an accountable person in relation to the provision of such supplies as specified in that determination, and (C) such supplies as specified in that determination to be taxable supplies to which the rate specified in section 11(1)(d) refers. (b) Where a determination is made under paragraph (a), the Revenue Commissioners shall, as soon as may be after the making thereof, issue a notice in writing of that determination to the party concerned, and such determination shall have effect from such date as may be specified in the notice of that determination: Provided that such determination shall have effect no sooner than the start of the next taxable period following that in which the notice issued. (c) Where an authorised officer is satisfied that the conditions that gave rise to the making of a determination under paragraph (a) no longer apply, that officer shall cancel that determination by notice in writing to the party concerned and that cancellation shall 16

17 have effect from the start of the next taxable period following that in which the notice issued. (d) In this subsection authorised officer means an officer of the Revenue Commissioners authorised by them in writing for the purposes of this subsection. Section 8(3E) of the VAT Act has been amended, with effect from 8 th March 2010, to read as follows: (a) Notwithstanding the provisions of section 6(1) and of subsection (1), and subject to the provisions of subsection (3), where- (i) a person supplies services which are exempt in accordance with section 6 and paragraph (xxiii) of the First Schedule, then an authorised officer of the Revenue Commissioners shall- (I) where such officer is satisfied that such supply of such services has created or is likely to create a distortion of competition such as to place at a disadvantage a commercial enterprise which is an accountable person supplying similar-type services, or (II) where such officer is satisfied that such supply of such services is managed or administered by or on behalf of another person who has a direct or indirect beneficial interest, either directly or through an intermediary, in the supply of such services, make a determination in relation to some or all of such supplies as specified in that determination deeming (A) such person to be supplying such supplies as specified in that determination in the course or furtherance of business, (B) such person to be an accountable person in relation to the provision of such supplies as specified in that determination, and (C) such supplies as specified in that determination to be taxable supplies to which the rate specified in section 11(1)(d) refers. 17

18 (b) Where a determination is made under paragraph (a), the Revenue Commissioners shall, as soon as may be after the making thereof, issue a notice in writing of that determination to the party concerned, and such determination shall have effect from such date as may be specified in the notice of that determination: Provided that such determination shall have effect no sooner than the start of the next taxable period following that in which the notice issued. (c) Where an authorised officer is satisfied that the conditions that gave rise to the making of a determination under paragraph (a) no longer apply, that officer shall cancel that determination by notice in writing to the party concerned and that cancellation shall have effect from the start of the next taxable period following that in which the notice issued. (d) In this subsection authorised officer means an officer of the Revenue Commissioners authorised by them in writing for the purposes of this subsection. Section 117 of the Finance Act, in addition to amending Sections 8(2A) and (3E) goes on to state that subject to the following exception, the provisions in relation to local authorities will come into force on 1st July The exception to this date relates to certain activities requiring a Ministerial Order. The Finance Act states that in so far as the new Section 8(2A) applies to the supply of community facilities, the provision will come into operation on such day or days as the Minister may by order appoint and different days may be so appointed for different purposes or different community facilities. In this context community facilities means (i) facilities for taking part in sporting or physical education activities and services closely related to the provision of such facilities, other than facilities for taking part in golf and for this purpose facilities for taking part in golf do not include facilities for taking part in pitch and putt, and 18

19 (ii) the hiring of halls, meeting rooms, grounds and other facilities of a similar nature to non-profit making sporting, cultural, social and community organisations. 19

20 The new Schedule 7 to the VAT Act is as follows: ACTIVITIES LISTED IN ANNEX 1 OF COUNCIL DIRECTIVE 2006/112/EC OF 28 NOVEMBER 2006 (1) Telecommunication services; (2) supply of water, gas, electricity and thermal energy; (3) transport of goods; (4) port and airport services; (5) passenger transport; (6) supply of new goods manufactured for sale; (7) transactions in respect of agricultural products,carried out by agricultural intervention agencies pursuant to Regulations on the common organisation of the market in those products; (8) organisation of trade fairs and exhibitions; (9) warehousing; (10) activities of commercial publicity bodies; (11) activities of travel agents; (12) running of staff shops, cooperatives and industrial canteens and similar institutions; (13) activities carried out by radio and television bodies in so far as these are not exempt pursuant to Article 132(1)(q) of Council Directive 2006/112/EC. Commentary As can be seen, the above legislative changes open up a very different VAT landscape for local authorities. At time of going to print Revenue have not put in the public domain any written guidelines as regards the implementation of the new provisions. However, as I understand it, they are currently working closely with a number local authorities with a view to understanding accounting systems, income and revenue streams, activities, etc. Following this process Revenue, via local districts, will communicate with all local authorities in relation to the changes coming into effect on 1 st July

21 Revenue has indicated that from that date the State, local authorities and public bodies will be taxable persons if they provide services outside their regulatory function or if they engage in any activity listed in the new Schedule 7 to the VAT Act. They also indicated such bodies would also be taxable persons in respect of regulatory functions where not to do so would result in a significant distortion of competition. In that context, Revenue has indicated their view to be that the ECJ had ruled that significant need only be more than negligible and that there does not have to be actual competition in place, but rather there need only exist the potential for competition. It is expected that in due course Revenue will publish lists of activities of local authorities that they view as chargeable to VAT and that they view as outside the scope of VAT. For example, the supply of graves will be regarded as vatable at the 13.5% rate. Private operators and competitors will find this useful for comparing the VAT treatment of their activities with that of local authorities. Thus it would appear that VAT registration and compliance issues lie ahead for probably all local authorities. It is expected that the EU Commission will be actively monitoring the implementation of the legislation in the context of the ECJ judgment in the Commission v Ireland, and thus there will be an onus on the State and Revenue to ensure that the new regime is implemented properly. In that context it is not clear how the discretion given to the Minister to apply VAT to community facilities sits with the full implementation of the ECJ Judgment. The approach in the legislation certainly appears to be a novel way of implementing an ECJ Judgment. As regards competition, and complaints by private operators, Revenue have indicated that if a private operator makes a complaint that a local authority is either in competition with him, or in general, that complaint would be acted upon. In this context Revenue are of the view that the private operator could make his complaint in writing to his Revenue District, in line with normal procedures, but that he will not be told of the outcome of any enquiry into the affairs of another Revenue customer. 21

22 A further issue raised with Revenue related to whether there would be any transitional measures put in place for local authorities that engage in capital expenditure before they become taxable persons in relation to their activities, and whether the local authority would be entitled to claim a backdated, potential VAT input credit. Revenue have indicated that in their view local authorities would not have a retrospective right of deduction. It is also my understanding that even where a local authority is successful in an appeal that gave rise to a right to deduct historic VAT incurred on costs, and that a VAT repayment had to be made, the Department of Finance s position is that any future Exchequer funding for that particular local authority would be reduced by the amount of VAT refunded. Thus, the actual financial outcome of any such action would be the legal costs of the appeals process and a reduction in funding resulting in a net loss position. It would appear that Revenue and the Department of Finance have taken a firm line on this, notwithstanding that this line actually increases payments by the Exchequer to the EU. One area where there will be considerable locked-in VAT is in new social and affordable housing disposed of on or after 10 th July The supply will be chargeable to VAT at the 13.5% rate, but none of the VAT incurred on acquisition/development will be recoverable, and adjustments under the capital goods scheme will not be allowed. For state and public bodies and local authorities there will be many issues to consider - whether or not an activity is or is not outside the scope of VAT, VAT rates, VAT recovery percentages, VAT registration, VAT compliance, etc. At time of going to print there remains many unanswered questions, and there will be certainly more developments in this area in the near future. 22

23 VAT on Property The National Asset Management Agency [NAMA] No paper would be complete at this moment in time without a comment on the ever topical NAMA. Whilst much has been written, I have no doubt much more is to be written. Like all things, NAMA will have its own VAT issues, and the NAMA Act contained a number of further amendments to the Value Added Tax Act 1972, as amended. In brief, as you are aware, NAMA was set up to take over property loans from the banking sector. NAMA will give each of the borrowers an opportunity to present their business case and based on an analysis of the business case NAMA will decide whether to foreclose on the loan or not. Like any other bank if NAMA believes the loan will not be repaid it can take over the property and seek to dispose of the property to satisfy the loan. This can be by way of obtaining an order vesting the property in NAMA or indeed by NAMA appointing a receiver over the property. Thus there is the possibility of supplies of property both to NAMA and by NAMA, or supplies of property by a receiver appointed by NAMA. In this paper I do not propose to get into the very fine detail of this area of VAT on property, but rather my intention is to flag the matter for practitioners as something for consideration. In my limited commentary I will focus on supplies of property to NAMA and supplies of property by NAMA. Supplies by a receiver would be similar to any transactions conducted by a receiver, and time does not allow for consideration of these here. Supplies of Property to NAMA As indicated, there have been a number of changes to the VAT Act to bring in specific provisions to deal with the property transferred to NAMA. The transfer of properties to NAMA are called "relevant supplies" in the legislation. 23

24 The legislation provides that where a property is transferred to NAMA and the transfer would be exempt from VAT as either: an old property [Section 4B(2)(b)]; or a used second hand property [Section 4B(2)(c)]; or an old building [Section 4B(2)(d)]; or a used second hand building [Section 4B(2)(e)] NAMA is deemed to have exercised an option to tax in respect of these transfers and NAMA is required to self account for the VAT chargeable on the transfer of the property. No joint option is required by borrower/supplier and NAMA. If the transfer of a property to NAMA would be exempt as either: The transfer of an exempt freehold reversion created prior to 1 July 2008 [Section 4(9)]; or The transfer of an exempt transitional freehold [Section 4C(2)]; or The exempt assignment of a legacy lease [Section 4C(6)(b)] NAMA will not be entitled to opt to tax that transaction. If the transfer of a property to NAMA would be exempt as the transfer of a property that had not been developed in the last 20 years [Section 4B (2)(a)] NAMA has the choice whether to opt to tax. Whilst this has all the appearances of a real mire of rules, these rules were drafted in this way to ensure that the VAT cost of transferring a property into NAMA was kept at a minimum. In all the situations where NAMA cannot opt to tax no Capital Good Scheme claw back could arise for the borrower/supplier on the exempt transfer. This is because a condition of qualifying for exemption as an exempt transitional freehold or an exempt assignment of a legacy lease is that no VAT was recovered on the acquisition or development of the property. Therefore there is no VAT to be clawed back under the Capital Goods Scheme in the event of an exempt sale. 24

25 There is a special provision in section 4C(11)(b) that ensures that no Capital Goods Scheme claw back will arise on the transfer of exempt freehold reversions created before 1 July In the situations that NAMA is deemed to opt to tax (i.e. where it is an old property/building or a used property/building), it will generally be the case that VAT was recovered on acquiring or developing the property. By NAMA opting to tax the borrower/supplier will not face a Capital Goods Scheme adjustment that it probably cannot in any event pay. As regards situations where NAMA may chose to opt (i.e. where the property has not been developed in the last 20 years), if the property has not been developed in the last 20 years there would be no Capital Good Scheme claw back of previously recovered VAT as the adjustment period would have expired. In these circumstances one assumes that NAMA would not opt to tax. I am not absolutely clear as to why NAMA is left with discretion to opt to tax these types of transfer, but no doubt time will tell when there are transactions stress testing this legislation. Supplies of property by NAMA Sales of property by NAMA will be subject to the normal sales rules. Where NAMA is obliged to opt to tax a property that it acquires, it will be sitting with a Capital Good with a Capital Good Scheme adjustment period of 20 years. These properties will all be exempt properties. Therefore when NAMA sells these properties, unless they are redeveloped, they will still be exempt from VAT. NAMA will be reliant on the future purchasers to agree to opt to tax. If the future purchaser does not agree to an option it would appear NAMA will be faced with a claw back of the VAT recovered on the reverse charge when acquiring the property. Given the current condition of the property market the claw back on NAMA, when the properties are eventually sold may well be less that the claw back on the borrower/supplier to NAMA if the transfer to NAMA was not opted. This is because 25

26 NAMA is acquiring the properties at a low base cost whereas the borrower probably acquired or developed the property at a high base cost. As such it will generally make sense to have these properties opted. However given the potential for future claw backs, one can't help but wonder if some discretion over the option should have been left with NAMA. Residential Property There has been an additional sub section added to section 4B(7), section 4B(7)(c), this provides that where a developer of residential property, or a person connected to the developer of residential property, transfers the property into NAMA, NAMA will be deemed to be connected to the developer for the purposes of applying section 4B(7) to future sales of that property. In effect NAMA will have to charge VAT on future sales of residential properties transferred into it by the developers of those properties. PRE-CONTRACT VAT ENQUIRIES This is a document which has been prepared by the Law Society of Ireland. It should be raised by a purchaser on a vendor and to which replies should be received prior to signing the contract for the purchase of property. What is currently in general use is the Law Society published working draft of this document. Obviously, given the quantum of ongoing changes to the VAT on property legislation this document will probably be subject to further revision over time. Practitioners are advised that any such amendments will be communicated to the solicitors profession in due course. The document should be raised by the purchaser and responded to by the vendor at the pre-contract stage. This is vital if the purchaser s advisor is to be in a position to advise his or her client on the VAT implications of a transaction. The document should also prove to be a useful tool for a vendor and should be completed by the vendor prior to the drafting of the contract for sale thus enabling the vendor to draft the VAT special condition appropriately according to the circumstances of the transaction. 26

27 I would recommend that, on closing of a transaction, the purchaser should seek confirmation from the vendor that the replies in the document are still correct and accurate. The document is divided into 7 parts, which are as follows: Section 1 - No VAT chargeable on the sale. Section 2 - Vendor charges VAT at 13.5% rate. Section 3 - Purchaser self accounts for VAT at 13.5% rate. Section 4 - Transfer of Business (TOB). Section 5 - Sale of Let Property. Section 6 - Vendor charges VAT at 21% rate. Section 7 - Tenant s Refurbishment. The purchaser should ensure that the vendor has answered all the enquiries in full in the section(s) which are relevant to the sale of the property. In this context, before answering the enquiries, the vendor should be satisfied as to the VAT status of the property and the accuracy of the replies, as these will be relied upon by the purchaser. Property Transaction Contract Clauses - VAT Special Condition 3 of the Law Society General Conditions of Sale is the clause (or the foundation of the clause) governing VAT from a contractual perspective in relation to the sale of freehold interests, freehold equivalent interests, and the assignment or surrender of legacy leases. Below is the current version in use. The version printed here does not include the guidance and footnotes present on the Law Society General Conditions of Sale, and this version is included here so that those involved in property transactions can familiarize themselves with the nature of the clause. Please note that this version of Special Condition 3 may be subject to revision over time. Any such amendments are communicated to the solicitors profession. 27

28 3.1 In this Special Condition: Adjustment Period, has the meaning attributed to that term under Section 12E(2) of the VAT Act; Accountable Person, Assignment, Surrender and Immovable Goods have the meanings attributed to those terms by Section 1 of the VAT Act; Capital Goods, has the meaning attributed to that term under Section 1 and Section 12E(1) of the VAT Act; Freehold Equivalent Interest, has the meaning attributed to that term under Section 1 and Section 3(1C) of the VAT Act; Interest, has the meaning attributed to that term in Section 4(1)(b) of the VAT Act; Interval and Refurbishment, have the meanings attributed to those terms under Section 12E(2) of the VAT Act; VAT, means Value Added Tax; and VAT Act, means the Value Added Tax Act 1972 (as amended) and related VAT regulations. 3.2 Save as may be provided in any other clause of this Condition 3, in addition to the purchase price, the Purchaser shall pay to the Vendor the amount of any VAT as shall be exigible in relation to the Sale, same to be calculated in accordance with the provisions of the VAT Act and the Purchaser shall pay this amount to the Vendor on the later of the completion of the Sale or where an invoice is required to be issued by the Vendor in accordance with the provisions of the VAT Act on delivery of such invoice to the Purchaser [and to the extent that the Sale of the Subject Property is of an Interest in respect of which a joint option to tax under Section 4C(6)(b) of the VAT Act may be exercised, such joint option is so exercised. 3.3 In the case where the Sale is exempt subject to the joint option to tax as provided in Section 4B(5) of the VAT Act and the Subject Property being a freehold or Freehold Equivalent Interest comprises or includes any Capital Good in respect of which the Adjustment Period remains unexpired, the joint option to tax the Sale under Section 4B(5) of the VAT Act is hereby exercised by the Vendor and Purchaser such that the Purchaser will account for relevant VAT arising on the Sale on a reverse charge basis in accordance with the provisions of Section 4B(6) of the VAT Act. 28

29 or In the case where the Sale of the Subject Property, being a freehold or Freehold Equivalent Interest, is exempt from VAT (notwithstanding the fact that it is exempt), on completion in addition to the Purchase Price, the Purchaser shall pay to the Vendor the sum of [ ] being the agreed amount to be paid by the Purchaser to the Vendor in respect of the Vendor s liability to account to the Revenue under Section 12E(7)(b) of the VAT Act as a consequence of the Sale. or In the case where the Sale of the Subject Property, being a freehold and/or a Freehold Equivalent Interest, is both exempt from VAT and comprises a Capital Good or Capital Goods, on completion, in addition to the Purchase Price, the Purchaser shall pay to the Vendor the sum of [ ] being the amount which as a consequence of the Sale the Vendor is liable to account for to the Revenue under Section 12E(7)(b) of the VAT Act reduced as appropriate on the date of completion in the event of the passing of any Interval or Intervals between the date hereof and the date of completion, unless not less than 3 days prior to the Closing Date: the Purchaser demonstrates to the reasonable satisfaction of the Vendor that the Purchaser is a Taxable Person; and the Purchaser notifies the Vendor in writing that the Purchaser irrevocably joins with the Vendor in the exercise of the joint option to tax the Sale under Section 4B(5) of the VAT Act; in which case, the joint option to tax the Sale under Section 4B(5) shall be treated as duly exercised and the Purchaser shall account to the Revenue for the VAT arising on the Sale on a reverse charge basis in accordance with the provisions of Section 4B(6) of the VAT Act. 3.4 In the case where the Sale is by way of Assignment or Surrender of an interest in Immovable Goods to which Section 4C(4) of the VAT Act applies and the Purchaser is a person referred to in Section 4(8)(a) of the VAT Act, which status the Purchaser hereby 29