VAT on Commercial Property: What are the rules?
VAT on commercial property is a complicated area with plenty to consider. Many business owners know that when they sell their business the sale will be free from VAT, but sometimes they don’t understand why. At Alexander & Co, our property accountants have shared some of the key VAT aspects to be aware of when leasing or purchasing a commercial property.
The lease or sale of a commercial property is usually exempt from VAT. If so, the tenant or purchaser does not have to pay VAT. Although this is a positive overall, when a landlord or vendor makes an exempt supply of a property, they cannot recover the VAT on all related costs, which can be substantial.
Opt to tax and 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 need to usually 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.