1. BUSINESS Catherine Mc Govern AITI, ACA
Operation of VAT
in your pharmacy
In this article, Catherine Mc Govern AITI, ACA, Tax
Director with PKF O Connor Leddy & Holmes Ltd, talks
about some VAT aspects, particularly VAT on property,
that may affect your pharmacy business.
Group VAT registration
Group VAT registration may
be of interest to connected
companies. Where the
Revenue authorises Group
VAT registration, VAT does not
arise on transactions between
Group members and there is
no requirement to issue VAT
invoices on these transactions.
One of the Group members
will have to undertake to file
the VAT return on behalf of
the VAT Group.
To become members of a
VAT Group, the companies
must be closely bound by
financial, economic and
organisational links.
VAT on Property
There are important VAT
issues that should be
considered before completing
a purchase, sale or leasing
of property and detailed
VAT advice will be required.
The VAT implications of any
transaction will depend on the
specific history of the property.
A detailed review of the VAT
history of the property and
the lease/acquisition contract
should be undertaken before
they are signed to ensure the
appropriate VAT treatment
is applied to the sale/
acquisition/lease.
1. VAT on leasing a property
Prior to July 2008, when a
lease in excess of 10 years was
granted, VAT was accounted
for on the creation of the
lease. Therefore, no VAT was
payable on the annual rental
income. However, for leases
granted after 1 July 2008, the
landlord can resolve to ‘opt
to tax their letting’, i.e. the
landlord can charge VAT at
23% on the rental income to
their tenant.
If a pharmacy is now being
charged VAT on their rental
income, they should review
their VAT liability. On the
issue of the new lease, VAT
advice should be obtained as
there are various VAT points
and clauses in the lease to be
considered.
For instance, if a
pharmacy tenant undertakes
refurbishments works on
a property, and vacates the
property within 10 years, this
can lead to a VAT cost to the
pharmacy tenant. The lease
can provide that the landlord
take over the remaining CGS
(remaining VAT obligations)
of the refurbishment on the
cessation of the lease which
would give rise to no VAT costs
for the departing tenant. If the
landlord takes over the above
CGS, they will need to put it
to a fully Vatable use for the
remainder of the VAT life so
they do not have a VAT cost
in respect of same.
IPUREVIEW JUNE 201538

2. 2. VAT on subleasing
a property
If a pharmacy has incurred
VAT on the acquisition or
leasing of a property and, if
they sublease part/all of the
property, there will be VAT
implications. In brief, VAT at
23% should be charged on
the leasing/subleasing of a
property in order to avoid
a loss of VAT previously
reclaimed.
3. VAT on the acquisition
of Property
The sale of a property may not
be automatically Vatable. In
this section we will discuss the
position when:
The sale of a property is
exempt but the vendor wishes
to tax the sale (“Joint election”)
to avoid a VAT cost.
If the property being sold
was previously let and is being
acquired by a VAT registered
entity, there will be different
VAT implications depending
on whether the property is
new or old.
3.1 Joint Election to Tax Sale
The vendor of the property
may request a purchaser
to exercise a ‘joint
election’, which brings
an otherwise VAT-exempt
property into the VAT
net. A vendor would seek
a joint election in order
to avoid an obligation to
repay VAT to Revenue
previously reclaimed
on their purchase and/
or development of the
property.
The joint election is not
mandatory, i.e. both vendor
and purchaser must agree
in writing to make the
sale Vatable.
When a joint election
is exercised the vendor
should not charge VAT.
Instead, the purchaser is
required to self-account
for VAT at 13.5% on the
sales price of the property
in their VAT return. If the
purchaser has full VAT
recovery they will not have
an immediate VAT cost on
purchasing the property.
However, post
completion of the sale, the
purchaser will be required
to put the property to a
Vatable use for 20 years
(i.e. the VAT life of a
completed property) in
order to avoid a claw-back
of input VAT.
3.2 Purchase of Property,
which was previously let
If a commercial property,
which was previously let
on a continuing basis, is
purchased ‘transfer of
business relief’ (TOBR) will
apply if the purchaser is
registered for VAT for any
purpose.
Where TOBR applies,
if the property is ‘new’
for VAT purposes, the
purchaser does not have to
pay VAT to the vendor but
they are deemed to have
been charged VAT.
If the purchaser does not
have 100% VAT recovery,
they must pay to Revenue
the difference between this
amount and the amount
that would have been
deductible if this amount
of VAT had been charged
on the sale of the property.
Example 1: ‘New’ Property
A pharmacy company
purchases a ‘new’
commercial property for
€600,000. But for TOBR,
VAT in the amount of
€81,000 (i.e. €600,000 x
13.5%) would have been
charged to the company
by the vendor. As TOBR
applies, no VAT is charged
to the company by the
vendor. If the company’s
percentage VAT recovery
is only 90%, it must pay
€8,100 VAT to Revenue (i.e.
€81,000 - €81,000 x 90%).
If the property is ‘old’,
for VAT purposes the
purchaser must take-over
the vendor’s remaining
VAT obligations in respect
of that property.
Example 2: ‘Old’ Property
The pharmacy company
is VAT registered for the
purpose of its trade. On
6 June 2015 it purchased
an ‘old’ commercial
property with vacant
possession. This property
was previously let on a
continuing basis. The
purchase price paid is
€600,000. The vendor
purchased the property on
15 June 2006 for €1,135,000
(including VAT) and
reclaimed VAT of €135,000.
The vendor’s accounting
year end is 31 December.
TOBR rules apply
in respect of this sale.
Therefore, the company
must take-over the
vendor’s VAT obligations
(in this example for the
remaining 11 years). The
vendor must provide the
purchaser with a VAT
record (‘Capital Good
Scheme’ record) for this
property, showing the
remaining VAT obligations
the purchaser is required
to take over. Following on
from this example, the
remaining VAT liability
taken over is €74,250
(€6,750 per annum). Part
of this VAT may become
a cost to the purchaser as
a vendor in the future if
they do not sell it to a VAT
registered purchaser.
If the purchaser has 90%
VAT recovery, it is required
to pay €675 VAT to Revenue
after the end of each year
for the next 11 years.
If the purchaser is not
VAT registered the above
liability (€74,250) is the
vendor’s liability. Therefore,
a non VAT registered
purchaser could acquire
the property without any
VAT implications.
4. Connected Party Sales
There are specific VAT on
property rules for the sale of
property between connected
parties, which if not addressed
could lead to an immediate
VAT cost to the vendor.
Therefore, it is important to
review the VAT position where
you personally own a property
and intend to sell same to a
connected company.
Catherine Mc Govern is a Tax
Director with PKF O’Connor
Leddy & Holmes Limited. Contact
details: c.mcgovern@pkf.ie /
01 496 1444 / www.pkf.ie.
“ A detailed review of the VAT history of
the property and the lease/acquisition
contract should be undertaken before
they are signed to ensure the appropriate
VAT treatment is applied to the sale/
acquisition/lease.”
IPUREVIEW JUNE 201540