Barry Cowen (Offaly, Fianna Fail)
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96. To ask the Minister for Finance his views on whether VAT clawback acts as a disincentive for owners of commercial properties to convert their properties to residential use; and if there are exemptions from VAT clawback conversion of existing commercial premises into residential lettings. [31816/17]

Paschal Donohoe (Dublin Central, Fine Gael)
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I am advised by the Revenue Commissioners that VAT is governed by the EU VAT Directive (Council Directive 2006/112/EC), with which Irish VAT law must comply. A basic principal of VAT is that the final consumer bears the cost of the VAT charge; registered traders recover VAT on their input costs and charge VAT on their supplies. Where a taxable person is engaged in making taxable supplies and purchases a commercial property for use in the business the taxable person has an entitlement to reclaim the VAT on the costs incurred in purchasing that property. The taxable person then accounts for VAT on their business supplies. In this way VAT is ultimately borne by the final consumer.

Where a person reclaims VAT on the purchase or development of commercial premises and subsequently changes the use of the premises to a non taxable one, that person is required to make an adjustment in respect of the VAT reclaimed to reflect the non-taxable use to which the property is now being put. If VAT was not clawed back in this fashion the VAT treatment of the transactions would be contrary to the VAT Directive and would result in the payment of a subsidy for users of premises where the use is changed from taxable to non-taxable. Obviously, such an arrangement would be likely to result in abusive tax planning activities to benefit from VAT deductibility in relation to properties developed for non-taxable use.

In relation to land or buildings, the period over which claw back of VAT incurred in acquiring or developing a property can take place is twenty years from the date the property was purchased. Where the property is diverted to a non-taxable use subsequent to that twenty year period no claw back of that VAT takes place.