Most businesses need a place from which they can operate. Consequently, they interact with the property market in some way. Normally this is either by buying, leasing or renting a premises from which they can do business.
The cost of acquiring real estate is substantial; it is common for the purchase price, or total of rent payments, to be many thousands of pounds. At the current 20% VAT rate, any VAT can easily be tens of thousands of pounds in its own right. Managing that cost, so VAT is either avoided or recovered, is normally key to ensuring a property deal is commercially viable.
As a buyer/tenant the easiest starting point is if the property is being sold as “VAT Exempt”. In this case, the vendor/landlord cannot charge VAT on the price being paid and therefore you don’t have an immediate VAT issue to manage.
If you’re able to identify this at the outset of the transaction, then aside from ensuring your solicitor puts appropriate warranties into the contract/lease, to ensure VAT does not later become a ‘surprise’, the VAT issues discussed in the remainder of this note can be avoided.
If the vendor/landlord has notified HMRC of an Option to Tax on the property being sold/leased, then anyone buying or leasing the property from them will have a VAT issue to manage. An overview of Option to Tax and its administrative requirements is available here if you need a refresher.
The first issue to deal with is the question of ‘Transfer of Going Concern’. Structuring transactions as a TOGC for VAT purposes is attractive because it means the seller does not charge VAT.
If the property is vacant, and you are intending to occupy the property yourself once you are its owner/tenant, then TOGC cannot apply. TOGC only applies for property rental businesses, so if you’re buying/leasing somewhere for your own use (rather than as an investment – we deal with commercial property as an investment in a separate article) you breach the TOGC requirements.
Unfortunately, TOCG questions cause a great deal of wasted time during property transactions because people with limited understanding can try to go down a dead end. Their hope is understandable, but ultimately does not profit anyone.
If you are acquiring a property for your own use, try not to fall down a TOGC trap.
If the vendor/landlord is obliged to charge VAT, then the buyer/tenant’s challenge becomes recovering any VAT they’ve paid. VAT recovery here will stand on two main legs: evidence of the VAT paid, and intention to use the building in the course of a business that charges VAT to its customers.
The basics of VAT still apply to a property transaction, on the same basis as any other.
VAT can only be reclaimed from HMRC if you hold sufficient appropriate evidence to support the reclaim. If you buy a whole building, it is likely that your subsequent VAT Return will show a large repayment due back from HMRC – and it is wisest to assume they will carry out a ‘credibility check’ on the return before they authorise any payment. Therefore, it normally pays to have the necessary paperwork on hand to ensure that everything can be processed quickly.
With a property, it is also wise to have evidence of the vendor/landlord’s Option to Tax on the property in question. This evidence shows the vendor’s obligation to charge VAT and having it on hand is valuable insurance against HMRC trying to disallow the VAT claim. A disallowed VAT claim would force you back to the vendor/landlord to seek damages from them – normally a costly and time-consuming legal process that should be avoided if at all possible.
It is usually well worth having your tax adviser review this paperwork before the transaction completes, so you have assurance that there are ‘no surprises’ lurking.
The other basic VAT rule that applies here is the nature of your business. If your business charges VAT to all its customers, you are likely entitled to recover all the VAT you’ve paid out to buy/lease your new property. If your business does not charge VAT to all its customers there will likely be a restriction on the amount of VAT it can reclaim.
If you’re renting your new property then VAT on periodic rent payments will be recoverable via your partial exemption calculation (if this applies to you, you’ll know what it means!).
If you’ve bought your new property, then you’ll need to make an initial apportionment between VAT you can recover and VAT that is irrecoverable. Thereafter, you may be obliged to monitor the use of the property over the next decade via a mechanism called the Capital Goods Scheme. Any business with an asset in the Capital Goods Scheme should have their tax adviser do an annual review to make sure the calculations are correct.
Most businesses who have to pay VAT on the cost of premises they occupy should be able to recover the VAT on their next VAT Return. When buying a property, VAT will be a significant cashflow bump, but not an absolute cost. Nevertheless, anyone undertaking a large acquisition like a property should ideally take bespoke advice to make sure there are no surprises.
Any business who cannot recover all the VAT they spend will likely find that recovering VAT on their premises is also restricted. Specialist advice will be particularly relevant to them, and, identifying a VAT Exempt property would be of particular benefit.
If you have any questions or need advice on buying/leasing a commercial property for your own occupation, give our Associate Director, Iain Harris a call on 0131 364 4191 or email Enable JavaScript to view protected content..
Please note the above commentary is a general guide only, and should not form the basis of specific decision-making.
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