VAT on commercial property: What are the rules?

Date: August 1, 2021

Summary of Key Points on VAT and Commercial Property

VAT Exemption:

The lease or sale of most commercial properties is VAT-exempt, which benefits buyers or tenants by reducing costs. However, landlords or vendors cannot reclaim VAT on related expenses unless they opt to tax the property.

Opting to Tax:

Property owners can choose to charge VAT (currently 20%) on sales or leases. This allows them to reclaim VAT on associated costs, such as refurbishments. However, this decision is irrevocable and must be carefully considered based on the target market (e.g., charities may not benefit)

Transfer of Going Concern (TOGC):

If a property with tenants is sold and the buyer continues letting it without significant changes, the transaction may qualify as a TOGC. This makes the sale VAT-free, provided specific conditions are met.

VAT on New Properties: Properties less than three years old are subject to VAT at the standard rate. Buyers may opt to tax such properties to recover VAT on acquisition costs but must then charge VAT on future rents or sales unless TOGC conditions apply.

Mixed-Use Properties: These can complicate VAT calculations due to differing rules for residential and commercial components. Owners should seek advice to ensure compliance and optimize tax recovery.

Importance of Professional Advice:

Given the complexity of VAT rules and potential penalties for non-compliance, consulting property tax specialists is essential for informed decision-making.

VAT on commercial property is a complicated area with plenty to consider. When selling business, owners often expect the sale to be VAT free, but many are unsure what their tax 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.

VAT Exemption

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.

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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.

CONTACT OUR SPECIALIST PROPERTY TAX ADVISORS

Transfer of Going Concern (TOGC)

Transfer of going concern (TOGC) is something else to consider when looking into VAT on commercial property. When an opted to tax property is sold with the benefits of an existing lease or sold with tenants in place, the vendor is usually required to charge VAT at 20%.

However, if the prospective owner allows the continuation of letting the property to the tenants, then subject to certain conditions, the transfer is a TOGC, therefore no VAT is charged on the purchasing price. In these circumstances, it becomes a very attractive option.

VAT on ‘new’ commercial property

If a property is fewer than 3 years old, it is considered ‘new’, and therefore liable for VAT. The sale of a new build property will be liable for VAT at the standard 20% rate.

Someone purchasing a ‘new’ buy-to-let commercial property may want to choose to tax it, as this will enable them to recoup the VAT charged on the acquisition. Once opted in they will be required to charge and account for VAT on future rents and the sale of the property. This is unless the purchase meets the conditions for TOGC.

VAT on commercial property – what are the pitfalls?

As the rules on VAT and commercial property are so complex, there are many pitfalls that you could fall down. To ensure that you are fully informed, here are problematic areas of commercial property and VAT.

Mixed-use properties

If a property is mixed use, there can be additional issues with VAT. This is because commercial properties are treated differently in terms of taxation than how residential buildings are taxed. This affects the VAT that can be recovered on any expenditure, as well as the amount charged on the eventual sale of the property.

If you’re unsure whether your property is liable for VAT, you can contact HMRC or leave it in the capable hands of our property accountants, who can as clients, advise you on the next steps to take.

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Zero-rating properties – Are newly built properties VAT-free?

Whilst residential property is usually zero rated for VAT, this usually is not the case for commercial property. For non-residential property, any VAT that has been paid by the vendor can often be reclaimed.

VAT on commercial property – our property experts are here to help

With HMRC penalties for non-compliance and increasing property values, VAT mistakes can be costly. Getting correct and reliable advice from the beginning is important and our property accountants can help guide you through the process.

For professional advice on VAT re commercial property or on other related issues, we can provide a quote to assist. To contact Alexander & Co, email info@alexander.co.uk. Alternatively, simply fill out the form below and a member of our property team will be in touch.

For additional information and guidance on purchasing commercial property and the tax implications associated with it, please view our guide on the tax implications of purchasing commercial property.

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