Joan Burton (Dublin West, Labour)
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Question 211: To ask the Minister for Finance if property developers who build houses and rent out rather than sell them can claw-back VAT paid on construction costs; if there have been changes to this element of the VAT regime during 2008 or if there are such changes planned for 2009; the rationale for such changes; and if he will make a statement on the matter. [46973/08]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I am advised by the Revenue Commissioners that, in common with any trader engaged in taxable activities, property developers engaged in the building and selling of houses are entitled to deduct VAT incurred on their input costs. The position regarding property developers who, having deducted VAT incurred on the development of residential property, subsequently rent rather than sell completed houses is set out below.

Where a house is completed before 1 July 2008 and rented on or after that date, there is a full claw-back of the VAT deducted by the developer. This claw-back is triggered by section 4C(3) to the Value-Added Tax Act 1972, as amended, and is effected at the time the letting of the residential property is created.

The Finance Act 2008 introduced a new VAT on property regime from 1 July 2008. The new regime includes a capital goods scheme (CGS) that regulates VAT deductibility in relation to property by reference to the taxable and exempt use of the property over the "life" of the property, which in most cases is 20 years. Where a house is completed on or after 1 July 2008, and rented on or after 1 July 2008 (an exempt activity), no immediate claw-back of the VAT occurs. Instead, the developer is required to adjust the VAT deductibility at the end of the second CGS interval and each subsequent interval until the property is sold. In effect, therefore, VAT deducted by the developer is clawed back proportionately by reference to the length of the letting over the 20 year "life" of the property. Full details on the CGS are available under Chapter 6 of the VAT on Property Guide, which is available on the Revenue website at www.revenue.ie.

I would add, however, that the subsequent sale by a developer of a residential property that he has rented out remains fully taxable.