Selling commercial property can be a complex process, especially when it comes to understanding and managing Value-Added Tax (VAT) implications.

It is crucial that property sellers, together with their advisors, are aware of the potential VAT pitfalls to ensure compliance and avoid unexpected liabilities. The VAT treatment of a property sale and potential related costs should be considered early in the sale process.

This article highlights key VAT considerations when selling commercial property in Ireland.

Understanding VAT on Commercial Property

In Ireland, the sale of commercial property is generally subject to VAT if it is regarded as “new”. In such cases, the applicable VAT rate is 13.5%.

A property is regarded as being “new” for VAT purposes in the following circumstances:

• The first supply of a completed property within 5 years of its completion (the “five-year” rule)
• The second and subsequent supply of a completed property within 5 years of its completion is subject to VAT if it has not been occupied for 24 months in aggregate (the ”two-year” rule)
• Any supply of developed, but incomplete, property within 20 years of when the development ceases (the “20-year” rule).

However, the VAT treatment can vary depending on several factors, including the property’s history, the VAT status of the seller and the buyer. Here are some essential points to consider:

• Exempt Properties and the Joint Option to Tax

If a commercial property has not been developed in the past 5 years or if it has been occupied for at least 24 month since its most recent development, then the sale of that property is generally exempt from VAT.

However, if both the seller and buyer are VAT registered, they can jointly opt to tax the sale, making it subject to VAT. This election must be agreed by both parties and documented in the legal contracts.

There are several reasons why the parties may elect for a joint option to tax the sale of an exempt property, including:

• Where the seller has previously reclaimed VAT on the purchase or development of the property, selling the property as an exempt supply could trigger a VAT clawback under the Capital Goods Scheme (CGS). By opting to tax the sale, the seller can avoid this clawback;
• When the joint option to tax is exercised, the buyer accounts for the VAT on a reverse charge basis. This means the buyer, rather than the seller, is responsible for accounting for the VAT to Revenue. This can simplify the transaction for the seller;

• If the buyer is a taxable person and intends to use the property for taxable activities, they can recover the VAT charged on the purchase. This can be beneficial for the buyer as it allows them to reclaim the VAT, effectively reducing the cost of the property.

However, where a property is sold and the joint option to tax is elected for, a new 20 year VAT life is created. This is a significant VAT burden for the buyer. Where the buyer has reclaimed all the VAT arising on the acquisition of the property, then in order to retain this VAT reclaim the buyer must continue to use the property for fully VATable purposes for the whole of the 20 year VAT life. For this reason, the buyer will often look to be compensated in terms of a lower purchase price for taking on such a risk.

Revenue’s Guidance on the VAT treatment of property sales can be accessed via the following link:

https://www.revenue.ie/en/tax-professionals/tdm/value-added-tax/part11-immovable-goods/supply-of-property/supply-of-property.pdf

• Properties that are Let with a Sitting Tenant:

 For VAT purposes, the transfer of a let property with a sitting tenant can qualify as a Transfer of Business (TOB) if it includes the transfer of the totality of the assets necessary to continue the business.

Where TOB applies, the seller does not charge VAT on the property sale. However, it also means that, depending on the circumstances, the buyer can “step into the shoes” of the sellers from a VAT perspective. Consequently, the buyer potentially takes on responsibility for VAT obligations relating to the property from before the property sale.

In such cases, the seller is obliged to provide adequate VAT records to the buyer so that the buyer can ascertain the potential VAT liability being assumed in relation to the property.

Revenue’s Guidance on the application of TOB to property sales can be accessed via the following link:

https://www.revenue.ie/en/tax-professionals/tdm/value-added-tax/part03-taxable-transactions-goods-ica-services/transfer-of-business/transfer-of-business.pdf

Best Practice for Managing VAT on Commercial Property Sales

• Engage VAT specialists early in the process   
• Understand the property’s VAT status and potential liabilities from the outset.  
• Ensure clear communication between the buyer, the seller and their respective advisors.
• Properly document all agreements, options to tax, and CGS adjustments to avoid disputes and ensure compliance.

Contact us today to schedule a consultation with our experienced tax advisors. Visit our website at www.taxkey.ie to learn more.