VAT on Commercial Property

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: Land and property VAT

VAT on Commercial Property

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.   

VAT on Land

The same rules apply to undeveloped land as to Commercial Property. Generally, the sale or lease of land is exempt from VAT. 

Option to Tax

Owners of Commercial Property can Opt to Tax the land & buildings.  If an Option is made, this results in the sale proceeds or rent being subject to VAT at the standard rate.  The main benefit for the vendor or landlord is that VAT on associated costs can be recovered from HMRC.  However, if the buyer or tenant cannot recover the VAT that they are charged on the sale or lease, this may result in the deal becoming commercially unviable for them.  An Option to Tax lasts for 20 years, so careful consideration is required before making a decision.   

An Option to Tax has no effect over Residential Property.

TOGC

Special rules apply where a property is sold as part of the transfer of a business.  Providing the new owner continues the business, the overall transfer is generally 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.  The rules are complex and it should not be taken for granted that a sale will be a TOGC.  

A common area of misunderstanding is where there is a sale of a trade and its premises, and the seller owned the trade and the premises in the same company but the buyer will be acquiring the property and trade in different companies.  The seller used the property as trading premises but the buyer company will hold it as an investment property.  These are not the same businesses so there is not a TOGC.  The same applies in the reverse scenario, where the property and trade where in different companies before sale but the same company acquires both of them.

VAT on Construction

• VAT & Construction

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. 

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 VAT advice is obtained by both parties on any property transaction.

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.

Other articles;

• What is VAT? - a Guide to Value Added Tax
• Understanding VAT Reverse Charge
• VAT Inspections & Investigations Guide