VAT and villas to let – still confused!

As reported in a previous article, there are many questions which are not answered by the new VAT authority regarding real estate.

Residential lets are exempted from the 19% VAT charge, but then this directive goes on to say that if the landlord carries out a business activity, he might most likely be responsible to charge it.

You can appreciate that the 19% VAT charge is high, so if villa/apartment owners let their units out as a business e.g. seasonal lets (villa to let) as well as AirBnB, will they not be liable for the VAT charge? If this is the case (still waiting for the VAT people to let us know) the rental cost will be increased by this (19%) amount, making the cost of renting for holidays, etc. quite higher, reducing their tourist demand. The villas to let are nowadays big business and bearing in mind this source of demand in Cyprus, with approximately 20% of the tourists opting for this option, you can appreciate this problem.

Of course, most of these lets are done through the internet and foreign specialised firms and nobody declares the income. Tax fraud it is indeed, but so far nobody in the government bothers to do anything, not even the C.T.O. If the VAT is an allowable expense by the tenant to be deducted from the VAT received, in this case there is no particular problem. But as most of the lets are to individuals, especially foreign tenants, who do not have VAT registration, as such it is a problem.

Since 2008 Cyprus has avoided to have a VAT placed in place for lets, land sales, etc. and for one reason or another it has managed to by-pass this issue. Now with the E.U. demand that there will be no more postponement, our government produced a rush law so that we are not charged with a hefty penalty. Being a rush job there are so many loose ends and this is unbelievable.

The director of VAT suggests that for any ambiguities to seek advice from him. That is okay, but what about in the meantime until all or most questions are answered? So no one is 100% clear whether to charge VAT or not. If not charged and it ought to have been charged, the authority may come back after several years to impose the VAT plus penalties, interest on unpaid amounts, etc. Unlike other tax authorities, the VAT is one of the most “ruthless” and uncompromising authority and VAT non-payment is considered to be a “criminal offence”.

In one case where our office sold three properties we duly charged VAT on our commission, but then the deals fell through and we refunded the reservation paid and cancelled the bill. The VAT detectives then visited our accounts department for two days with three staff to investigate the matter. Nothing was done wrongly but it is just to show that they mean business (unlike income tax, municipal taxes, etc). It was explained to us that VAT is a charge on behalf of the government with the VAT charger acting as a collector on behalf of the government. So if something goes wrong it is the collector’s fault.

I am not sure whether most of the questions/uncertainties will be addressed over the next six months or so, but I am concerned what will be the situation in the meantime. For those who do not act “correctly” there is no excuse that “the law was not clear”. Unfortunately we were informed by our legal consultants that there is no difference if it is clear or not.

I must tell you the following interesting story regarding a kebab house at Nicosia.

The shop was quite busy, but the VAT/Tax returns declared were next to nothing. The authorities could not pinpoint the volume of the shop’s business since the kebab product is a cash business and for a low amount. Suddenly the tax authorities came up with the idea of calculating the volume of the wrapping paper which the shop bought. It came out based on this that the shop was selling approximately 1,000 pitta of kebab per day. End result of tax and VAT charges the kebab proprietor for 250,000 euros. So watch out.