The Rules of VAT on Commercial Property

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VAT on Commercial Property

VAT in relation to 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.

VAT Exempt

The lease or sale of a commercial property is usually exempt VAT. If so, the tenant or purchaser does not have to pay VAT. Although this is great overall, when a landlord or vendor makes an exempt supply of a property, they can not recover the VAT on all related costs, which can be substantial.

Opt to Tax

Commercial property owners have the option to charge VAT at 20% (currently the standard rate). When a landlord or vendor opts to tax a 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.

Remember, it’s not always appropriate opting to tax, as some businesses cannot recover VAT incurred on the costs. These include businesses in health and charity. 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.

Transfer of Going Concern

Transfer of going concern is (TOGC) another consideration. 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 purchasing price. In these circumstances, it becomes an attractive option.

Sale of ‘new’ Commercial Property

Finally, the sale of ‘new’ commercial property, which will be liable to VAT at the 20% rate. If a property is less than three years old, it’s deemed ‘new’. A purchaser of a buy- to- let commercial property is much more likely to choose an opt to tax in order, enabling them to recoup the VAT charged on the acquisition. Unless it’s TOGC, once opted in they will be required to charge and account for VAT on future rents and sales of the property.

Property Accountants in Manchester

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 the property team at Alexander & Co can help guide you through the process. Make sure you get in touch for further information before making any transaction.