VAT ON COMMERCIAL PROPERTY- FACTS TO BE CONSIDERED
While exempt of sale or lease of commercial property from VAT may sound good in one context, it’s considerably significant when a vendor or landlord makes an exempt supply of a property as they left unable to recover VAT incurred on related costs. Exempt from VAT means neither purchaser nor tenant would have to pay VAT, however there are certain exceptions to the rule:
- The sale of a commercial building within 3 years of its completion remains standard rated.
- Option to Tax opted by owner or developer.
- Property has been refurbished or renovated and the owner or landlord is looking to recover the VAT costs associated with that work.
Option to Tax (OTT):
Commercial property owners may for the purpose of VAT go for opt to tax for land. All the supplies one makes of his/her interest in the land and building will normally be standard rated at 20% and they will be able to recover any VAT costs incurred in making those supplies. You must normally make your notification within 30 days of your decision to the (Notify H.M Revenue & Customs), however if any exempt supplies of the land or building have been made previously you may need HMRC permission before you can opt to tax.
But opting to tax may not always be appropriate as some businesses e.g. financial, insurance, health, welfare and charitable sectors are unable to recover VAT incurred on costs. Hence thoughtful consideration is required before you make a decision.
Revoking an option to tax:
Once a supplier has notified HMRC of their option to tax, he may revoke the same without prior permission within 6 months “cooling off period” if all the conditions set out below are met:
- Less than 6 months have passed since the day on which the option had an effect.
- No tax has become chargeable on a supply of the land as a result of the option.
- No transfer of going concern has occurred.
- You have notified the revocation to HMRC on form VAT1614C
Additionally, one must satisfy 1 of the 3 conditions in paragraph F or obtain HMRC permission.
You may claim VAT on:
- Legal and professional fees.
- The purchase of the property, monthly/quarterly rents and lease premiums.
- Day-to-day repairs, utilities and cleaning.
- Refurbishment, refitting and extensions.
Transfer of going concern (TOGC):
If the property being sold is an investment property that has tenants sitting in with an existing lease, this commercial property transaction may be classified as a “transfer of going concern” (TOGC).
A commercial property sold qualifies as a TOGC if:
- Capable of being used by the purchaser to carry on the same kind of business as that operated by the seller.
- Capable of forming a separate business in their own right.
Being outside of the scope of VAT, TOGC becomes an attractive option as no VAT is charged on the purchasing price. For meeting TOGC condition if the seller is registered for VAT and has opted to tax the building, the buyer needs to do likewise and the notification of the same must be received by HMRC by the date of transfer.
Sale of new commercial property:
Every commercial property which is less than 3 years old is deemed as new and will be liable to VAT at 20% (current standard rate). Hence a purchaser of a new commercial property is much more likely to choose to opt to tax on rents going f0orward and on a future sale of the property in order to recover the VAT charged on an acquisition.