A property developer is liable for VAT on sales of developed residential property and is entitled to recover the VAT incurred in the development of that property. However, under the EU VAT Directive, there is no scope to allow VAT deductibility in relation to the development of properties that are to be put to a tax-exempt use. The VAT Consolidation Act 2010 provides that the letting of residential property is exempt from VAT. Thus, where a developer incurs VAT on the construction costs of a residential property and lets the property upon completion, the developer is not entitled to recover the VAT on those costs as the letting of the property is exempt from VAT.
Section 97 Taxes Consolidation Act 1997 (TCA) sets out the deductions allowable in computing rental income chargeable to income tax or corporation tax under Case V of Schedule D. Income chargeable under Case V is computed on the gross amount of rent receivable less allowable expenses incurred in earning that rent, as specified in section 97(2). These are:
- rent payable on the property by the person chargeable,
- rates payable on the property by the person chargeable (either in accordance with the terms of a lease or as an expense of the agreement under which the rent/receipts were received),
- the cost of goods provided and services rendered by the person chargeable in relation to the letting of the property (where such person is either legally bound under the lease to provide such goods and services or the provision of such goods and services constitute an expense of the agreement under which the rent/receipts were received),
- the cost of maintenance, repairs, insurance and management of the premises borne by the person chargeable and which constitute an expense of the agreement under which the rent/receipts were received, but excluding any capital expenditure,
- interest on money borrowed to purchase, improve or repair the premises.
Accordingly, any VAT incurred on the purchase of a premises is not deductible under section 97(2) TCA against rental income from the premises, for either income tax or corporation tax purposes.
I would add that where a person, not being a property developer, has incurred VAT on the conversion of a property that is to be let as residential accommodation in a special regeneration area under the Living City Initiative scheme (Chapter 13 of Part 10 TCA refers), capital allowances will be available on the VAT inclusive eligible expenditure, provided the terms and conditions of that scheme have been met.