David Duffy discusses one Irish High Court case in relation to VAT waivers of exemption, as well as Revenue manuals on various matters.
Right to deduct VAT
In Killarney Consortium v Revenue Commissioners [2024] IEHC 732, the High Court upheld a decision of the Tax Appeals Commission (“TAC”) that a property owner was not liable to a clawback of VAT previously reclaimed as the relevant provisions of Irish VAT law were held to be in breach of EU law.
The judgment considered the Irish VAT rules regarding waivers of exemption from VAT on lettings of property. A waiver was an election made by a landlord before 1 July 2008 to charge VAT on its lettings of property with a term of less than 10 years.
While no new waivers could commence from 1 July 2008 onwards (as new VAT on property rules became effective on that date), pre-existing waivers continued to apply to lettings in property which had been acquired by the lessor before 1 July 2008.
In addition, the legislation continued to provide for a clawback to Revenue of the excess of any input VAT reclaimed over output VAT paid in connection with a waiver, when it was subsequently cancelled.
It was these waiver cancellation provisions that were the specific focus of the case.
The taxpayer, Killarney Consortium, (the “Consortium”) purchased a property in 2004 for development and letting.
The Consortium exercised the waiver of exemption and reclaimed VAT on the purchase of the property and associated costs. However, due to the property market downturn, the property remained vacant for significant periods and the VAT charged on rents was significantly less than the VAT reclaimed.
The Consortium sold the property in 2017 at a significant loss. While was paid on the sale of the property, the VAT originally reclaimed still exceeded the VAT paid by approximately €590,000.
Irish law provides that where a waiver has been exercised and is subsequently cancelled a clawback of the deficit is payable. Consequently, Revenue issued an assessment to the Consortium for the deficit amount.
The Consortium appealed against the Assessment on the basis that the property had only and ever been used by it for taxable activities. It argued that EU VAT law made no provision for a clawback of VAT merely because the level of input VAT deducted exceeded the level of output VAT paid. The TAC had found in favour of the Consortium and determined that the assessment should be reduced to zero.
The High Court, in upholding the decision of TAC, confirmed that where a business is fully engaged in taxable supplies (i.e. supplies of goods or services subject to VAT) it has a right to deduct input VAT incurred on purchases used for the purposes of those taxable supplies.
This right to deduct arises irrespective of whether VAT charged on supplies exceeds VAT incurred on purchases. Provided VAT is chargeable on supplies, there is a right to deduct VAT incurred on costs associated with those supplies.
The High Court held that the waiver cancellation was in these circumstances contrary to EU law and the principle of fiscal neutrality. The High Court referred to several cases of the Court of Justice of the European Union in support of its conclusion, including for example Feudi di San Gregorio Aziende Agricole SpA (C-341/22), where it was held that the right to deduct VAT cannot be limited by future economic performance.
As such, the High Court upheld the decision of the Commissioner to disapply section 96(12) and reduce the Assessment to zero. We are not yet aware if the judgment will be further appealed by Revenue to the Court of Appeal.
Revenue guidance updates
Revenue have issued a number of new or updated guidance notes in relation to VAT since 1 January 2025.
eBrief No. 001/25 updated the Tax and Duty Manual (“TDM”) on the management of special investment funds. This includes reference to changes in Finance Act 2024 which updated the definition of special investment funds to clarify that an alternative investment fund (“AIF”) managed by an Irish alternative investment fund manager (“AIFM”) comes within the scope of the VAT exemption for fund management.
eBrief No. 001/25 issued a new TDM on the VAT treatment of heat pump heating systems. This again ties back to Budget 2025 and Finance Act 2024 changes to introduce the reduced 9% VAT rate to the supply and installation of heat pumps.
The TDM notes that, “[t]he supply and installation of a heat pump heating system can include key equipment such as heating controls, radiators, underfloor heating emitters and the associated pipework where required to facilitate the effective/efficient operation of a heat pump.”
eBrief No. 051/25 issued a new TDM on the VAT treatment relevant to taxi drivers. This confirms that while taxi services are exempt from VAT, VAT can nonetheless arise on related supplies such as taxi radio charges and facilitation fees charged by online platforms.
David Duffy FCA, AITI, Chartered Tax Advisor, is Indirect Tax Partner at KPMG
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