Revenue to pursue developers over lost VAT

Developers who availed of a VAT loophole closed on Budget day are to be pursued by the Revenue Commissioners. Tens and possible hundreds of millions of euro could be involved.

In some instances, the Revenue is aware of the tax manoeuvre being used in multi-storey apartment complexes.

It expects that there are many developments where the device was used, but which have not yet come to its attention.

The Revenue has decided that it will contest the legality of the manoeuvre in all instances where it discovers that it has been used.

As the use of the measure is by its nature not notified to the Revenue, it does not have a clear view as to the amount of lost VAT which may be at issue.

However, the Taoiseach, Mr Ahern, told Mr Conor Lenihan (Fianna Fáil) in the Dáil earlier this week that in one case the Revenue estimates the amount of lost VAT could be €18 million.

VAT on sites is charged at 13 per cent. The Revenue has warned developers who had uncompleted contracts with purchasers at midnight on Budget day not to pass on the 13 per cent VAT to the purchasers but to retain the agreed price.

"The developer who has been using the scheme should not seek to get more money from the purchaser. The purchaser has contracted to pay a set price and the developer should honour this," a spokesman said.

The instruction from the Revenue is subject to contract law and the nature of individual contracts.

The manoeuvre involves dealings between a developer, builder and purchaser of a property. The developer buys undeveloped land and then contracts a builder to convert it into developed land. This could involve something as straightforward as levelling the land.

The builder then charges the developer a fee, inclusive of VAT. The developer does not register for VAT and does not reclaim the VAT charged by the builder.

In this way the developer seeks to establish his non-registered status in terms of VAT.The construction of the building then ensues. After this, the developer leases the site to the builder on a short lease.

The purchaser of the house, or an apartment in an apartment complex built on the site, buys the site from the developer and pays the builder for building services, instead of simply buying the house or apartment in the more usual, straightforward manner.

Sales of sites that are on short term leases can be VAT exempt and the developer, who is not registered for VAT, does not charge VAT to the purchaser of the property.

The Revenue will now contest any such deals, arguing that VAT should have been paid and that the various manoeuvres entered into to avoid the tax were artificial and motivated solely by the desire to avoid tax.

The Revenue is pursuing the developers rather than the purchasers on the basis that the developers were obliged to have charged the VAT.

As of midnight on Budget day, the exemption from VAT of site sales where the site was on a short term lease, has been ended.

The change was implemented as a result of the Revenue Commissioners bringing the matter to the attention of the Department of Finance and the Minister for Finance, Mr McCreevy, deciding to act.