VAT and Commercial property

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

VAT and Commercial property

Introduction – VAT and commercial property

It is worth noting that VAT and commercial property is a complex area.

This article is to act as a brief summary of some of the key VAT issues to be aware of where one is entering into the purchase or lease of a commercial property.

In general, there are four main issues to think about for VAT purposes:

  • VAT exemption;
  • Option to tax;
  • Transfer of a Going Concern (“TOGC”); and
  • New Commercial Property Sales

VAT Exemption

What is VAT exempt and what are the consequences?

The default position is that commercial property (like residential property) is exempt for VAT purposes.

Where the VAT exemption applies, the purchaser or tenant does not have to pay VAT.

The talk of a VAT exemption sounds serendipitous. However, it does mean that when a vendor or landlord makes a supply of a property then they are unable to recover VAT incurred on related costs.

When it comes to property, then these costs can be substantial.

Election or Option to Tax for VAT purposes

A Commercial property owner can elect or opt to charge VAT (at the standard rate) when selling or leasing their property.

Where they have opted to tax then they must usually charge VAT on all supplies they make relating to that property. Therefore, they must charge VAT on the sale or lease of the property.

The benefit is that the landlord can also recover VAT he, she or it has incurred on costs related to the property. For example, where significant funds have been spent on the refurbishment of the property then the VAT could be recovered.

However, opting to tax is not always appropriate. This is because some businesses will not be able to recover VAT incurred on costs – for example, businesses involved in financial services, insurance, health and the charitable sector.

HMRC should be notified in writing of the option to tax. For all intent and purpose, the election is irrevocable – so it should not be entered in to lightly.

Transfer of Going Concern (“TOGC”)

Where a property subject to an option to tax is sold with tenants in place or with the benefit of an existing lease, then the vendor will usually need to charge VAT at the standard rate.

However, where the purchaser intends to continue to let the property then, assuming certain conditions are satisfied, the transfer is a TOGC.

Here, no VAT is charged on the purchase price which is clearly attractive for most purchasers.

New Commercial Property Sales

The sale of new commercial property will be liable to VAT at the standard rate.

The property needs to be less than three years old.

As above, a person purchasing a new commercial property to let is likely to choose to opt so it can recover the VAT charged on purchase.

Following the option to tax, the purchaser will be required to charge and account for VAT on the rents going forward (and on a future sale of the property – unless it qualifies as a TOGC).

Conclusion – VAT and commercial property

VAT in relation to property is a complex area and it is an area where we often see mistakes. Such mistakes can, and often are, costly.

 

If you have any queries in relation to VAT and property, or VAT more generally, then please do get in touch.

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