VAT on commercial property: What are the rules?
VAT on commercial property is a complicated area with plenty to consider. When selling their business, owners can expect the sale to be VAT free, but many are unsure why and what their requirements are. Our property accountants at Alexander & Co have shared some of the key aspects of VAT to consider when selling, purchasing or leasing a commercial property.
The lease or sale of a commercial property is usually exempt from VAT. This can be a positive thing for tenants or purchasers of the property, as they won’t have to pay VAT. Although this can be beneficial for some parties, when a landlord or vendor makes an exempt supply of a property, they cannot normally recover the VAT on all related costs, which can be substantial.
To avoid this, landlords or vendors can opt to charge VAT on a commercial property. To do this, they must notify HMRC of their wish to charge.
Opt to tax commercial property
Commercial property owners have the option to charge VAT at 20% (currently the standard rate). When a landlord or vendor opts to tax property, they usually need to charge VAT on all supplies which relate to the property, therefore charging all rentals or sales. Landlords can, however, recover VAT that has been charged in relation to the property.
In the right circumstances, opting to tax can provide a real advantage, for instance, where expensive refurbishments have been required.
However, for some businesses it is not appropriate (or often, realistic) to opt to tax – many businesses simply cannot afford to recover VAT incurred on the costs. These include mainly businesses in health services and charity work. This is why it’s important to consider the market sector of potential tenants or purchasers before you make a decision.
HMRC needs to be notified in writing if you opt to tax. This decision is usually irrevocable, hence, why making the correct long-term decision is essential.
If you are weighing up your options and are unsure of whether to charge VAT our property advisors can assist you and are happy to provide a free quote to review your circumstances. You can also check our guide on property tax to find out additional information.