Without proper planning, VAT costs can have a damaging impact on the sale of farm land and buildings, explains Margaret Balfe.
When it comes to VAT, there are two types of farmer – the non VAT-registered or ‘flat rate’ farmer and the VAT-registered farmer.
Flat rate farmers are either solely engaged in agricultural production activities or have turnover from non-agricultural activities that falls below a certain threshold. While these farmers do not have to register for VAT, it often makes sense to register voluntarily if they have substantial VATable inputs and the VAT on their sales is low,
Other farmers are obliged to register for VAT either because they carry on VATable activities or their turnover from certain non-farming activities exceeds the relevant VAT threshold.
When selling property in Ireland, regardless of whether the farmer is VAT-registered, VAT must be considered.
A property sale is subject to VAT if the sale happens within five years of the property’s completion or last significant development. In this context, ‘development’ covers the construction, alteration, demolition or extension of buildings or land and engineering works, including works under the land, that adapt it for a materially altered use.
If a property has been occupied for less than 24 months, subsequent unconnected sales falling within the five year period from completion or development will also be subject to VAT.
The ability to recover VAT when acquiring or developing property depends on the extent to which the property will be used for VATable activities.
The level of VAT that can be recovered is determined by the Capital Goods Scheme (CGS).
For CGS purposes, the VAT life of a property is approximately 20 years for new developments or 10 years for refurbishments.
It is important to be aware that CGS rules apply to VAT registered farmers only. Flat rate farmers are excluded.
VAT on Property sales – Flat Rate Farmers
For flat-rate farmers, VAT cannot be reclaimed on the cost of purchasing land or buildings. However, a flat-rate farmer is entitled to recover VAT incurred in the construction of farm buildings, land drainage and land reclamation. To claim a refund, the farmer must submit a VAT 58 form to Revenue within four years of the end of the taxable period to which the claim relates.
It is important to be aware that a clawback arises if the farmer ceases to farm or ceases to use the building or land for farming purposes, within twelve months of the VAT having been incurred. Therefore, it is essential to review VAT reclaims via the VAT 58 mechanism before concluding any sale agreement so as to ensure there is no hidden VAT cost to the farmer selling his/her land or farm buildings.
Another important consideration is that where the land or farm buildings were developed or completed within five years prior to the sale, VAT may be due on the sale, even though the farmer is not VAT-registered person. Often, the sale will be to another flat rate farmer for whom the VAT is irrecoverable, so the seller will have to absorb the VAT in the agreed selling price.
VAT on Property sales – VAT Registered Farmers
VAT-registered farmers are treated the same as any other VAT-registered trader. They must charge VAT at the appropriate rate on supplies and can recover VAT on inputs directly related to the VATable trade being carried on. The entitlement to VAT recovery includes VAT incurred on the construction or development of farm buildings and land. The refund is claimed when farmers submit their VAT return to Revenue.
Under CGS rules, the VAT life of a property is normally 20 years and the use of the property must be monitored from a VAT point of view throughout this period.
VAT will also apply to sales of land or buildings if development or completion occurred in the five years prior to the sale.
Where a VAT-registered farmer sells after Year 5, but within 20 years of a new development (or 10 years of a refurbishment), he/she will face a clawback of VAT recovered on the development unless he/she can agree with the purchaser to apply VAT on the sale.
Unfortunately, there is no connection between this clawback and the VAT 58 reclaim credit mechanism available to flat rate farmers. Consequently, there is a significant VAT impact for VAT-registered farmers where the purchaser is a flat rate farmer.
The VAT rules associated with the buying and selling of property are complicated. Particular points to watch out for include:
VAT arising on a sale occurring within five years of development or construction. This impacts both flat rate and VAT-registered farmers.
VAT Clawback arising on sale within twelve months of incurring VAT recoverable via the VAT 58 mechanism. This impacts flat rate farmers.
VAT Clawback arising on sale within 20/10 years under the CGS. This impacts VAT-registered farmers.
It is vital to consider the potential impact of VAT costs when contemplating the sale of farm land and buildings. Always check with your accountant/VAT advisor before agreeing a sale as VAT costs may be avoidable with proper planning and negotiation.
Margaret Balfe, Senior Tax Consultant