The Finance Bill, published today, which implements the tax changes announced on Budget Day, did not expand the scope of the Vat cut as some in the construction sector had hoped.
The Vat rate on completed apartments was reduced from 13.5pc to 9pc in the Budget, effective immediately. This was designed to make apartment building more commercially viable, by reducing the gap between the cost of construction and what people are prepared to pay.
The construction of apartments has stalled over the last two years, because the viability gap had reached as high as €100,000 per unit. Housing Minister James Browne wants to revive apartment projects which have planning permission but never proceeded because the builders would make a loss by constructing them.
“This is a viability measure, not an affordability measure,” he said after the Budget.
However the reduced rate of Vat only applies on the sale of apartments, and not to construction costs related to their development, such as materials and design fees, which are still at 13.5pc.
The 9pc rate will not apply, either, to a development agreement, which is a contract whereby a builder agrees to complete a project for an investor, such as a local authority, rather than selling it on the open market.
Because of the affordability problem, a lot of apartments in Ireland are currently being built through such development agreements, mainly for assisted housing bodies (AHBs).
Janette Maxwell, a tax partner at Grant Thornton Ireland, said: “Budget Day announced a very welcome 9pc Vat rate on the sale of newly completed residential apartments, but the immediate legislation was ambiguous, and we had hoped for clarity in the Finance Bill.
“The bill did not extend the scope of the 9pc Vat rate to sites and development agreements. A contract for sale of a site, and the construction of a block of apartments, is still subject to Vat at 13.5pc.
“This will have inequitable impact, especially for those housing bodies who have entered into forward-funding agreements at the behest of the Government.”
The Finance Bill also did not spell out the meaning of housing “as part of a social policy”, a term used by Finance Minister Paschal Donohoe in his Budget Day speech.
It was thought this was an effort to comply with EU Vat law, which says member states can only apply reduced rates to certain goods, such as housing, if it is justified on social grounds.
The decision not to clarify this in the Finance Bill suggests the 9pc Vat cut will apply to all apartments, not just those earmarked for social housing.
Meanwhile, the Department of Housing said 1,653 commencement notices for new homes were lodged in September, up 43pc from the disappointing figure of 1,156 in August. It was the highest monthly total so far this year.
From January to the end of September, some 10,193 commencement notices were submitted. Of the units commenced last month, 34pc were apartments.