Reduced VAT rate: Developers call for proportionality

The Cyprus Land and Building Developers Association is calling for rational town-planning and fair socioeconomic criteria when deciding the new reduced VAT rate for first-time home buyers, saying it is important that any changes to the current law correspond to society’s real needs.

In a memo it submitted last September to the House Finance Committee – which is discussing a bill to amend the current VAT legislation – the Association took issue with certain provisions of the bill that place eligibility restrictions and criteria on things like the type of property (apartment or house) and its location. It instead proposed the introduction of the principle of proportionality. That is, to set a price limit (in this case up to €500,000) for the reduced VAT rate (5%) and any surplus to this amount can be calculated using the regular rate of 19%.

The developers believe that placing limits based on the type of building is wrong and problematic. For one, they say it could exacerbate one of the main town-planning problems faced today: the urban sprawl, which is a geographical spread beyond the main towns’ borders.

The association says this will lead property buyers to opt for houses instead of flats, given that they will benefit more from the reduced VAT rate, while it will encourage them to seek homes on the outskirts of town where real estate is cheaper.

And so it says this will further encourage the urban sprawl and abandonment of the city centers, while creating new needs, such as the construction of new roads and infrastructure, thus impacting on the environment and people’s quality of life.

On top, it will be a burden on the state’s coffers, what with new investments that will be required in infrastructure, hygiene, policing, education, health and other services.

According to the association, if we were just to take the value of the property into consideration when estimating the VAT rate, buyers will be in a position to choose their first residence freely, in line with their finances, taking advantage of the reduced rate without restrictions on the type of property or location.

The developers say that the only parameter that really needs to be decided – and at times revised in line with the real market conditions – is the limit on the value of the property.

Proposing the principle of proportionality, the association says this can ensure equal access to the reduced VAT rate on primary residences and even help reduce tax evasion, given that there will be no reason to conceal a property’s real market value.

For example, someone paying up to €500,000 for a primary home will receive the reduced VAT rate. With the bill currently under review, for someone paying €550,000, they would have to pay the full 19% VAT rate – that is €104,500. Whereas with proportionality, they would pay the reduced 5% rate for up to €500,000 and the normal 19% rate for the remaining €50,000 – so a total of €34,500, which is a significant difference.

“Essentially, for a residence costing just €50,000 more, the buyer will have to pay additional VAT of €70,000,” said the association. This means the buyer will either have to buy something cheaper than they want, or try to declare that the property is worth less, thus feeding the black economy and tax evasion.

Finance Minister Makis Keravnos has urged the House to pass the VAT bill for primary and main residences so as to avoid any negative consequences for the state, what with the European Commission’s warning over possible sanctions and measures expiring this past February.

Though he said he fully understood the concerns being voiced about the reduced VAT rate for primary residences, Keravnos added that any long-term tax measures cannot be based on temporary circumstances that have led to an increase in property prices. He pointed out that inflation has already declined.

Back in June, the government developed new rules for calculating preferential VAT on apartments and houses in Cyprus, making them more compatible with EU legislation. In order to avoid penalties from the European Commission, it proposed to introduce differences between charging 5% VAT on houses and apartments.

The new rules apply only to apartments worth up to €200,000 with an area of less than 110 m2 (the 5% VAT rate is charged only on the first 90 m2). For houses, they must cost up to €350,000 and be no bigger than 220m2 (the 5% rate is charged on the first 110 m2).

Another provision in the draft law is that in order to use the 5% rate, a buyer must apply to the VAT Service before 30 November of the year of purchase, after they have received the building permit.

(Source: InBusinessNews)