VAT on commercial property transactions is a complex area for business owners to navigate. Many know that when they sell their business the sale will be free from VAT, but they don’t always appreciate why.
To help you make the right decisions we’ve summarised the key issues you need to understand when leasing or purchasing a commercial property. However, as with all legal issues, it is important to consider seeking expert advice as soon as possible so you can avoid any potential pitfalls.
What Is VAT Exempt?
The sale or lease of a commercial property is usually VAT exempt and in these situations, the purchaser or tenant does not have to pay VAT. While there may be benefits to this, it can be problematic if a vendor or landlord makes a supply of a property exempt and is then unable to recover significant VAT incurred on related costs.
Option To Tax VAT
Commercial property owners can charge VAT at 20%, which is currently the standard rate when selling or leasing their property.
When a vendor or landlord opts to tax a property, they need to usually charge VAT on all supplies they make relating to that property, therefore charging all rentals or sales. Landlords can, however, recover VAT that has been charged in relation to the property. Under the right conditions opting to tax can provide a real benefit, especially in situations where substantial refurbishment costs may have been incurred.
Opting to tax is not always appropriate, as some businesses cannot recover VAT incurred on the costs. These VAT adverse businesses can be in many sectors, including financial, insurance, health and charity. That’s why it’s important to consider the market sector of potential tenants or purchasers before you decide.
An option to tax must be notified to HMRC in writing. It is almost irreversible so making the correct long-term decision is critical.
Transfer of Going Concern
Transfer of Going Concern (TOGC) is another key consideration.
Where an opted commercial property is sold with tenants in place or with the benefit of an existing commercial lease, the vendor would normally be required to charge VAT at 20% - the standard rate. However, if the prospective owner intends to continue to let the property to the tenants then, subject to certain conditions, the transfer is a TOGC and no VAT is charged on the purchase price. This is clearly attractive for most buyers in these circumstances.
However, if the prospective owner allows the continuation of letting the property to the tenants, then subject to certain conditions, the transfer is a TOGC and no VAT is charged on the purchasing price. This is clearly an attractive option for some investors.
Sale Of New Commercial Property
Sales of ‘new’ commercial property, which is property less than three years old, is liable to VAT at the standard rate. In these circumstances, the buyer who intends to rent the property out is likely to charge VAT on future rents and sale of the property in order to recover the VAT charged on an acquisition.
The exception to this is if the property qualifies as TOGC.
How Prideview Can Help
The cost of non-compliance can be an expensive mistake to make in commercial property. Getting the appropriate advice at the outset is important and that’s where Prideview can help.
This is only a brief introduction to what is a very complex and technical area, but our team can help you navigate all the nuances of the law comfortably.
To find out more, contact us here.