Navigating VAT on Commercial Property can be complex and confusing for a commercial property owner, with lots of jargon to understand. Our guide explores some of the key aspects, including what is a transfer of going concern (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.
Is commercial property exempt from VAT?
The sale or lease of a commercial property (unless it is new) is by default VAT-exempt, and the purchaser or tenant does not have to pay VAT on the purchase/lease.
The downside for the seller or landlord is the inability to recover VAT on the 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. Generally, the sale or lease of bare land is exempt from VAT.
The option to tax commercial property
Owners of commercial properties have the option to tax land and buildings, rather than treating them as exempt. This is known as the 'option to tax'. If an option to tax notification is submitted to HMRC, the sale proceeds or rental income will be subject to VAT at the standard rate.
The main advantage of opting to tax 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 when a property is sold as a transfer of a property 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 tenant in situ. The sale will 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
To qualify as a TOGC, both the seller and the buyer must use the property to carry on the same type of business. It is common for a trading company to sell its business property to a pension scheme. The trading company continues to trade from the property and pays rent to the pension scheme.
This does not qualify as a TOGC, as the seller used the property as trading premises, and the buyer has acquired an investment property.
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, which the seller or landlord would normally be responsible for. The sale or lease agreement may allow them to pass VAT on to the purchaser or tenant if HMRC does not agree that the transaction was either exempt or a TOGC. Both parties must 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 team to help guide businesses through the complex maze of 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
