Banks and other financial services companies won a potentially lucrative tax boost in the Budget when the Minister for Finance, Brian Cowen, launched an overhaul of VAT on property transactions.
The new system extends the period over which VAT can be deducted on the purchase of a new business property.
In theory, it could allow financial services firms to claim back hundreds of thousands of euro in VAT that would previously have been "trapped" in a transaction.
Under existing rules, VAT paid on property transactions can be claimed back just once after the deal is completed.
The new capital goods scheme to be introduced in July next year would, in contrast, ensure that any VAT deductible will be "proportionate" to the business use of a property over a 20-year period.
Banks are not allowed to claim full VAT back as other companies can because they do not charge VAT on their services. The extent to which they can claim any VAT back depends on their mix of business. For example, a bank that conducts a high-level business outside the EU will have a greater VAT recovery rate than an institution that concentrates on selling retail financial services in the Republic.
The new system will increase the proportion of VAT a bank can reclaim on a business property purchase. For example, consider a theoretical financial services company that bought a new, freehold business property in 2005 and paid VAT of €1 million on the purchase.
The bank had a VAT recovery rate of 10 per cent and thus was entitled to claim back €100,000 of the VAT it paid in the first year.
Under the old system, the remaining €900,000 technically had to be written off as "trapped VAT" unless the bank set up special tax arrangements to get around this. The new arrangements will, however, allow for some flexibility on this.
If the property is sold for taxable use, say, five years after its original purchase (in 2010, when the new rules apply), the owner will have 15 years remaining in the VAT life of the asset.
This means that they can, in theory, claim back 15/20 of the original VAT paid, provided VAT is charged on the sale. In this instance the sum would be €750,000. When the relevant proportion of VAT reclaimed in the first year is deducted from this, it would leave a sum of €675,000 that would previously have been dead money but can now be reclaimed.
Second-hand properties are not subject to VAT but if a financial services firm can persuade their buyer to opt into paying VAT and then reclaiming it, the arrangement could be used as a point of leverage in sale negotiations.
The bank could, for example, offer to share the benefit they would receive from opting to charge VAT.
