Navigating VAT on Commercial Property can be complex and confusing for a business owner, with lots of jargon to understand. Our guide explores some of the key aspects, including what is a TOGC and why do you need an Option to Tax.
However, there is no substitute for seeking specialist advice, as this is a complicated area and VAT errors and penalties can be significant. Learn more about Land and property VAT in our related blog.
Is commercial property exempt from VAT?
The sale or lease of a Commercial Property, unless it is new, is by default VAT exempt such that the purchaser or tenant does not have to pay VAT. The downside for the seller or landlord is that they are unable to recover VAT on costs associated with the sale or lease, which can be significant. This is when an Option to Tax may be relevant.
The same rules apply to undeveloped land as to Commercial Property. Generally, the sale or lease of land is exempt from VAT.
The Option to Tax commercial property
Owners of commercial properties have the option to tax the land and buildings, even though they are exempt. This is known as the Option to Tax. If they opt to tax, the sale proceeds or rent will be subject to VAT at the standard rate.
The main advantage for the seller or landlord is that they can reclaim the VAT on associated costs from HMRC. However, if the buyer or tenant cannot reclaim the VAT they are charged on the sale or lease, this could make the deal financially unfeasible for them. An Option to Tax is effective for 20 years, so it's important to carefully consider the decision before making it.
It's important to note that an Option to Tax does not affect residential property.
Transfer of a going concern (TOGC)
Special tax rules apply where a property is sold as part of the transfer of a business.
On the condition that the new owner continues to operate the business, the overall transfer generally falls outside the scope of VAT. For example, a commercial property may be sold with an existing tenancy in place. The sale can be a TOGC providing other conditions are met. Always remember the rules are complex; it should not be taken for granted that a sale will be a TOGC.
Exceptions
A common misunderstanding occurs when a business and its premises are sold by a seller who owned both the business and the premises in the same company, but the buyer is acquiring the property and the business in separate companies. This means the seller used the property as trading premises, while the buyer's company intends to hold it as an investment property.
Since these are different businesses, there is no Transfer of a Going Concern (TOGC). The same situation applies in reverse, where the property and business were in separate companies before the sale, but the same company acquires both of them.
New commercial property
The sale of a new Commercial Property (less than 3 years old) is not an exempt sale, and would be subject to the standard rate of VAT, although there are special rules if the building is to be used by a charity or not-for-profit business.
What can go wrong?
Sellers and landlords are responsible for applying VAT where applicable.
Failure to adopt the correct treatment can lead to significant costs, liability for which would fall on to the seller or landlord. The sale or lease agreement may then allow them to pass the VAT on to the purchaser or tenant. It is essential that both parties obtain VAT advice on any property transaction.
Can we help?
VAT remains one of the least understood of all taxes, which is why we set up a specialist VAT advisory department, to help guide businesses through the complex maze of VAT legislation.
Our team help with all areas of VAT from relatively basic issues such as initial registration, the completion and submission of VAT returns and advice on how to correct errors and mistakes, through to more complex issues such as assessments, control visits, cross border transactions, Option to Tax and DIY house builds.
If you own Commercial Property and wish to understand the VAT implications for your business; why not get in touch, and discuss your queries with a member of our team.
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Brian Gooch
I work extensively in the corporate owner managed business sector, covering transactional taxes, property taxes including Stamp Duty Land Tax and VAT, and all areas of business tax planning. I have considerable experience in maximising tax efficiency by reviewing business structures and planning corporate reorganisations.
View my articlesTags: VAT, Business Taxes
