When a property developer sells residential property, he must charge VAT on the sale at the standard rate of 15%. Sometimes market conditions make it difficult for a developer to sell newly built properties for extended periods of time. In such circumstances a developer will often recover ongoing expenses by entering into short-term leases for the properties until buyers are found. 

When a developer leases newly built residential property it constitutes a change of use from residential property development to residential letting.  This triggers the change of use provisions in the Value Added tax Act, 1991 (“VAT Act”) which provide for a deemed supply of the property that is being let. To understand why this happens one must consider the difference between a taxable and exempt supply. The sale of residential property by a developer is a taxable supply, while the leasing of residential property is an exempt supply. This means that a developer who builds to sell residential properties, as opposed to building to lease, is entitled to deduct input VAT for the build costs. If the developer cannot sell the properties and temporarily leases them (i.e., changes his use from a taxable supply to an exempt supply), he is required to make an output VAT adjustment in terms of section 18(1) of the VAT Act, based on the open market value of the property when the property is leased.

Section 18B was introduced into the Act providing for temporary relief for developers between 10 January 2012 and 1 January 2018. Since this provision ended the inequitable value attributed to the change of use adjustment has once again become a concern. It is proposed that, with effect from 1 April 2022, a new section 18D be introduced into the VAT Act to address the concern.

The new provision provides that, where a developer temporarily leases a residential property for less than 12 months, the property is deemed to be supplied for a consideration equal to the adjusted cost to the developer of the construction, extension or improvement of the property. The time of supply is deemed to be the tax period in which the lease agreement comes into effect.

It is important to note that the new provision only applies to property that is temporarily used for residential letting. This is defined as one or more lease agreements which do not exceed a combined total of 12 months. Lease agreements for fixed periods exceeding 12 months are specifically excluded and, in such circumstances, the change of use adjustment in section 18(1) would apply.

If the developer subsequently sells the property during the 12-month temporary letting period, it will be considered a taxable supply in the course of the developer’s enterprise. The supply is deemed to be for a consideration equal to the purchase price. However, where the property is:

• supplied by the developer within the ‘temporarily applied’ 12 month period; or
• no longer applied in supplying residential accommodation immediately after the expiry of the 12 month ‘temporarily applied’ period; or
• is subject to the section 18(1) adjustment,

the developer will be entitled to a deduction which is deemed for this purpose to be input tax.  The deduction is for an amount equal to the adjusted cost to the developer of the construction, extension or improvement of the residential property supplied.