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VAT Exemptions in Commercial Property Sales and Leases
When is a Commercial Property Exempt from VAT?
Generally speaking commercial property transactions sale or lease are exempt from VAT. The exceptions to this rule are where a property is less than three years old or where a landlord/seller has elected to charge VAT in these instances VAT is applied at the standard rate (presently 20% ).
Impact of VAT Exemptions on Sellers and Landlords
A property is VAT exemption may benefit the buyer but it may not always benefit the seller or landlord selling the property, as they are not able to recoup the VAT amounts on related expenses. If a seller or landlord has spent a considerable amount on a property renovation for instance they may seek to recover the related VAT costs but if the property is exempt from VAT they did be unable to do so.
Opting to Charge VAT on Commercial Property
Why Some Commercial Property Owners Choose to Charge VAT
Many owners of commercial real estate choose to charge VAT on commercial property at the regular rate for the reasons mentioned above. They can then recoup VAT that was applied to any expenses they incurred relating to the property by charging VAT on any supplies they make in connection with it.
The Opt-In Process and Compliance Requirements
If you are considering electing to charge VAT on a commercial property you must take care to comply with certain regulations as follows:
- This is an opt-in procedure you must actively make the decision to charge VAT on the relevant property. HMRC must be notified in writing within 30 days.
- Once HMRC has been notified, this decision lasts for 20 years (and is sometimes referred to as the ’20 year rule’).
- The decision needs to be timely – ideally before any exempt supplies are made in respect of the piece of land/property in question. Should you make exempt supplies before deciding to opt to charge VAT on a particular property, you will need to get special permission from HMRC to charge VAT on future supplies.
Things to Consider Before Electing to Charge VAT
Assessing the Market and Potential Clients
If you’re considering electing to charge VAT on a property, you should first consider the clients you’re likely to encounter. If your potential buyers or tenants are likely to fall into certain sectors – banks or charities, for instance – opting to charge VAT could have a negative impact on your business, as these industries make exempt supplies.
What’s the seller’s position?
If you’re purchasing a commercial property and are thinking about your tax position, you should consider the seller’s VAT position, too. If they opted to tax the property more than 20 years ago, you should find out if they can opt to reverse the election by submitting form VAT1614J before the sale takes place – this would mean that the sale could be an exempt sale which would avoid the 20 tax charge.
Whilst you would be able to claim the input tax if the property transaction were not exempt, reversing the election might offer a substantial saving, as SDLT is charged on the VAT inclusive price. moreover, it could be beneficial for cashflow purposes, as you would not need to pay VAT on the sale and then wait three months to reclaim.
Myths and Facts About VAT on Commercial Property
Do not be alarmed by the prevailing myth that if the seller has opted in to VAT tax on the property, the buyer must also opt in or they would be unable to reclaim the VAT charges. If you intend to use the property for taxable purposes, you would be able to claim input tax and moreover, as explained previously, the process is entirely ‘opt in. A property is not automatically ‘opted’ – each owner or landlord must make the decision themselves.
VAT Implications in a Transfer of Going Concern (TOGC)
How TOGC Affects VAT on Commercial Property Transactions
A final consideration: if the property that is being sold has tenants in place or an existing lease, and you intend to continue to run a property rental business from the premises, you may also benefit from another caveat: the terms of a Transfer of Going Concern (TOGC). As a TOGC falls outside the scope of VAT, no VAT will payable – however, you as the buyer would need to match the seller’s VAT position by the transfer date (meaning that if the vendor had opted to charge VAT on the property, you would need to have notified HMRC of your intention to do the same – and they would need to have received this information – by the transfer date).
Conclusion
Navigating VAT on commercial property transactions can be complex but understanding the key considerations and recent updates can help you make informed decisions. Whether you are buying or selling consulting with a qualified Property tax adviser ensures you remain compliant and optimise your tax position.
