Letting agent VAT

twanda

HI, quick question
My brother recently let out his house through an letting agent.
The tenant paid a deposit of €1200. Firstly, it took several weeks before the agent transferred the deposit to my brother.
Secondly, the agent kept around €300 which he said is VAT.
Does this sound correct?
Thanks

Sleipnir

Well, what's the VAT being charged on? Has your brother received an invoice which details what exactly what he's paying the VAT for? You can't charge VAT on the deposit itself because it's a 'deposit'. It's not paying for anything, if you get me.
You pay VAT on the cost of the service that the letting agent is providing, not on the deposit itself. The deposit of 1200 euro is held, it's not paying for anything.

If the agent has taken the VAT he would have charged for services provided, I would demand an invoice detailing the charges and VAT and I would also want a receipt for the €300 and if there's any bull, ask for the company's VAT number and tell them you're going to check it out with the VAT man.

Sounds like he's trying to pull a stroke to me.

Xiney

Also, there is no 25% VAT rate in Ireland.

twanda

Hi
Thanks very much for the advice. I will pass it on to my brother.

Sleipnir

Xiney wrote: »

Also, there is no 25% VAT rate in Ireland.

So it was on the deposit itself!!
That's fcuking disgraceful.

Jo King

It would seem most likely that the tenant paid one months rent in advance plus deposit equal to one months rent. Typically Estate Agents take their commission out of the first payment. Vat is chargeable on the commission at 21.5 %.
What your brother probably got was the balance of the first months rent after deductions.
Deductions will be the Agents fees. Vat on the fees. Advertising/marketing outlays. Any other outlays paid by the Agent.
Most of the above is tax deductible and a full statement of account should be provided by the agent.

eth0_

Jo King - wrong. The estate agent will take his fees out of the first months rent - the deposit is not a payment for anything and deductions can only be made in the event of damage to the property.

Jo King

The deposit remains repayable in full by the landlord to the tenant. The Estate Agent is not making a deduction from the tenants deposit as such.He is simply using the money provided by the tenant to secure his fees from the landlord. The estate agent does not hold the deposit until the end of the letting and return it to the tenant.

Sleipnir

Well, if the agent is doing what solicitors do and and taking their payment out of whatever monies the tenant has paid over then that would be normal practice.

However, €300 is a pretty round figure and the agent did say that it was "VAT" and not
"it's my fees and outlays plus VAT and I'll be sending you on an invoice and receipt"

Jo King

The o/p said around €300. He did not say a round €300.

Clearly the o/p needs to see a statement of account. It is possible that the fee plus VAT and ouitlaywas in the region of €1500 which would mean that the there was approximately €900 handed over.

Sleipnir

Jo King wrote: »

The o/p said around €300. He did not say a round €300.

Clearly the o/p needs to see a statement of account. It is possible that the fee plus VAT and ouitlaywas in the region of €1500 which would mean that the there was approximately €900 handed over.

Who mentioned €1500? Or €900?

VAT on €1200 is 258€ but, as we've already established, the VAT is not payable on the €1200 deposit as....that's a deposit.

If, as you suggest, the fee plus VAT etc was €1500 for example, why would the agent only take around €300 for VAT? You don't bill someone for VAT and subsequently follow that with a bill for the rest ex VAT

Fees are €1500 (for example)
VAT on €1500 is €322.50.
Tenant gives agent their deposit of €1200.
Agent takes out €322.50 for VAT only and passes on the balance of to the client? Without also collecting (part of) their fee at the same time?
Why?

Sorry, that just does not compute.

Jo King

The tenant would have paid €2400 being a months deposit and a months rent in advance. What the landlord got was the deposit less around €300. That means he got around €900. Without knowing what the agreed fee or outlays are it can only be assumed to be in the region of €1500 inc VAT.
There is no VAT on the deposit , there is VAT on the Agents fee which may be taken from the deposit before being passed to the Landlord. Go figure.

Capt'n Midnight

www.revenue.ie/en/tax/vat/leaflets/summary-checklist.pdf
tl;dr but seems to have the answer

VAT on Property – Summary of New Rules

The new VAT on Property Guide deals with the new rules for applying VAT to
property transactions that are effective from 1 July 2008. These rules are briefly
summarised below.

1. Supplies of property
The new rules provide that VAT must be charged @13.5% on the supply, in the
course of an economic activity, of a developed property while the property is
considered “new”. The supply can be either the sale of the freehold or the creation or
assignment of a very long lease (e.g. a lease for 99 years), which is referred to in the
guide as a freehold equivalent interest.
Two rules, the two and five year rules, determine if a property is “new” –
• The first supply of a completed property within five years of its completion is
considered to be the supply of a new property and is subject to VAT.
• The second and subsequent supply of a property is considered to be the supply
of a new property and subject to VAT but only if it takes place within two
years of occupation.

The supply of an “old” property (i.e. one no longer considered “new”) is exempt from
VAT.

2. Supply of residential property
VAT is always chargeable on the supply of a residential property by a
developer/builder - the two and five-year rules do not apply in such cases.

3. Supply of property in connection with a contract to develop the property
A supply of property in connection with a contract to develop the property is subject
to VAT, whether the property is developed or not and even it the person making the
supply is not carrying on an economic activity.

4. Joint option to charge VAT on supply of “old” property
Where the supply of property is exempt from VAT, the seller and buyer may opt to
charge VAT on the supply. Where they do so, the purchaser accounts for the VAT on
the supply.

5. Letting of property

21% on rents from a letting. A landlord who does so is entitled to deduct VAT
incurred on the acquisition or development of the property or on the portion of the
property to which the option relates.
Unlike the old waiver of exemption rules, the option to tax applies to a specific
letting. In other words, the landlord has the right to opt (or not to opt) in relation to
each letting. However, the option to tax does not apply to –
• a letting of residential property, or
• a letting between connected parties – the guide includes a full definition of
who are connected parties. A landlord can exercise an option to tax a letting or terminate an existing option to tax
a letting at any time. Doing either has implications under the capital goods scheme –
see below.

6. Capital goods scheme
6.1 The new rules introduce a Capital Goods Scheme (CGS). The CGS provides
for the adjustment of VAT incurred on the acquisition, development or refurbishment
costs or a property over the “VAT-life” of a property. The purchaser will be entitled
to deduct the VAT when it is charged to the extent that a property is to be used for
taxable purposes. The purpose of the CGS is to take account of changes in the use to
which the property is put over its “VAT-life” and to ensure fairness and
proportionality in the VAT system.

The “VAT-life” of a property is generally twenty years but the “VAT-life” of a
refurbishment is ten years. The VAT deducted initially is adjusted annually over the
“VAT-life” of the property.

The CGS does not have any impact in respect of properties that are used for the entire
“VAT-life” for either fully taxable or fully exempt purposes.

6.2 CGS and supplies of property
The CGS has special rules that deal with the supply of properties during their “VAT-
life”.
It is important to note that the exempt supply of an “old” property during its “VAT-
life” will mean a claw-back of some of the VAT deducted in respect of the acquisition
or development costs of the property. This can be avoided by using the joint option to
charge VAT on the supply. Similarly if VAT is charged on the supply of a property
during its “VAT-life” (either because the property is considered “new” or because of
an option to tax the supply of an “old” property), the seller will be entitled to deduct
some of the VAT incurred on the acquisition or development costs that the seller was
not previously entitled to deduct.

6.3 CGS and landlord’s option to tax lettings
The exercising or terminating of a landlord’s option to tax a letting during the “VAT-
life” of a property has CGS implications. Where the option is exercised during the
“VAT-life” of a property that had previously been subject to an exempt letting, the
landlord is entitled to deduct some of the VAT incurred on the acquisition or
development costs of the property that the landlord was not previously entitled to
deduct. Where an option is terminated during the “VAT-life” of a property, there is a
claw-back of some of the VAT that the landlord deducted on the acquisition or
development costs of the property. Both of these adjustments arise at the time the
option is exercised or terminated.

6.4 CGS record
The CGS applies to all new properties (developed) on or after 1 July 2008 or
properties refurbished on or after 1 July 2008. For all such properties, a “capital good
record” must be set up and maintained. This record should contain all of the
information relating to the scheme including how much VAT was deducted on the
acquisition or development and details of any adjustments under the scheme, etc.
7. Transitional rules – freeholds and leaseholds
Transitional rules apply to the supply of properties that were taxable under the old
rules and which are supplied on or after 1 July 2008. The rules for such properties
mirror the new rules above, i.e. the two and five year rules apply.

The two and five year rules also apply to certain leasehold interests, which are
assigned or surrendered on or after 1 July 2008. These are leases for a period of 10
years or more, but not freehold equivalents. Under the old rules the VAT charged on
the creation of these leases was based on the capitalised value of the lease. Where an
assignment or surrender of such a leasehold interest occurs on or after 1 July 2008, it
is subject to VAT. The taxable amount is calculated by reference to VAT charged on
the creation or previous assignment of the lease and the number of years remaining in
the “VAT-life” of the lease.

The CGS rules for dealing with changes in the use of a property during the “VAT-
life” of the property do not apply to freehold or leasehold properties that are subject to
the transitional arrangements. This means that no adjustment is required if the taxable
use of a transitional property (or a transitional leasehold interest in property) changes
from one year to the next
1
. However, where the sale of a transitional freehold occurs
or the assignment or surrender of a transitional leasehold interest occurs, the CGS
rules as outlined above apply. (Claw-back of some VAT if supply exempt, VAT
credit if taxable and not entitled to full deductibility.)

8. Transitional rules - waiver of exemption
There are also rules to deal with transitional properties that were rented prior to 1 July
2008 where the landlord has a waiver of exemption in place. The existing waiver of
exemption may continue in place for the majority of these properties on or after 1 July
2008. The waiver of exemption may also be cancelled under the old rules. There are
special cancellation rules that apply in respect of waivers of exemption in the case of
lettings between connected parties.


9. What to do now – checklist & further information
The Guide to VAT on Property sets out in detail the rules that apply to the various
types of property transactions. Concern has been expressed that tax practitioners,
accountants and solicitors need to review all of their clients’ property portfolios
before 1 July 2008 to ensure compliance with the new VAT on property rules.

In the vast majority of cases no action is needed in respect of existing properties. The
key transactions that need to be reviewed are lettings between connected persons
where the waiver of exemption has been exercised. In all other cases, action is only
required where the transitional property is being disposed of or let. Care has to be
taken in respect of the transactions that are currently being negotiated. If the
transaction is completed before 1 July 2008 the old rules apply; if the transaction is
completed on or after 1 July 2008 the new rules apply. The transitional rules generally
apply to properties that were subject to the old rules prior to 1 July 2008 and are
subsequently disposed of on or after 1 July 2008. The checklist below is to facilitate
agents in the changeover to the new rules.

1
The exception to this rule is if an exempt letting of a transitional property occurs after 1 July 2008. Checklist for Agents
















































What have you to do for 1 July 2008?

1. For clients who own and occupy properties for the purpose of their business –
generally nothing

2. For clients who have a leasehold interest that was taxed as a supply of goods
under the old rules – generally nothing.

3. For clients who are landlords and charge VAT on their rents (as they have
waived their exemption in respect of the letting of property) – check whether
any of the lettings are to connected persons (See 5 below)

4. Where the lettings are to unconnected tenants or in the circumstances
mentioned in 5 below, the old rules continue to apply to these lettings.

5. Where the lettings are to connected tenants -
(a) If the tenant is entitled to deduct at least 90% of the VAT charged on the
rents, (4) above applies;

(b) If the tenant is not entitled to deduct at least 90% of the VAT charged then
the waiver of exemption is cancelled under the old cancellation rules with
effect from 1 July 2008. In such circumstances, in the July/August 2008
VAT return, the landlord must account for the claw-back of the excess of
the VAT claimed in respect of property over the aggregate of the VAT
paid on the rents to 30 June 2008;

(c) But if the VAT payable on the rent over a twelve year period is greater
than or equal to the VAT claimed on the initial acquisition or development
of the property then (4) above applies;

(d) And if the VAT on the rents does not meet the conditions set out at (c) the
landlord can benefit from (4) if the VAT on the rent for the rest of the
twelve-year period is increased to meet the condition at (c).

6. If a client is in the process of selling or entering into a lease agreement before
1 July 2008 the old rules will apply if the sale or lease is entered into before 1
July 2008. If negotiations are under way and the supply takes place on or after
1 July the new rules apply.

7. If a client has a property on hands at 1 July 2008 and the property is sold on or
after 1 July 2008, it is subject to the new rules (2/5 year rule, etc).

8. If a client surrenders or assigns a leasehold interest on or after 1 July 2008 that
was taxed as supply of goods under the old rules and the client was entitled to
deduct any of the VAT then the assignment or surrender is subject to VAT on
an amount based on a CGS calculation.