Is VAT applicable when selling or leasing a Commercial Property? [Series: What the VAT?]

When selling a commercial property, there are two areas you need to clarify in order to determine if you have any VAT issues to manage:

• How did you use the property?
• How will the buyer use the property?

Is the property exempt from VAT?

As a seller/landlord the easiest starting point is if the property is being sold “VAT Exempt”. In this case, you cannot charge VAT on the price being paid and therefore you don’t have an immediate VAT issue to manage.

Essentially, if the property is more than three years old, and you’re certain that you’ve never notified an Option to Tax on the property, then the property you’re selling/leasing should be exempt from VAT.

If you’re able to identify this at the outset of a 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.

Is the Property taxable for VAT purposes?

If you notified HMRC of an Option to Tax on the property being sold/leased, or reclaimed VAT when you purchased the property then it is likely you will have a VAT issue to manage when selling/leasing the property. An overview of Option to Tax and its administrative requirements is available in a separate article if you need a refresher.

How to reflect VAT if you have notified Option to Tax on the Property

If you’ve notified HMRC of an Option to Tax on the property, then the default position would be to charge VAT when selling the property.

Provided the purchaser agrees this, your two main obligations are: -

• Provide the purchaser with a valid VAT invoice at the time the transaction completes
• Include VAT charged on the property in Box 1 (and the ex VAT value of the property in Box 6) of your next VAT Return following completion of the transaction, so that the appropriate VAT is paid to HMRC.

If you’re leasing your property to an occupational tenant, the requirements are similar: provide the tenant with valid VAT invoices for each rent period and ensure VAT on the rent is included in VAT Returns and paid to HMRC.

Special circumstances when selling a Property

Depending on the specifics, there may be different VAT rules that can apply. These rules may come into play based on what the person buying from you intends to do with the property.

When the Commercial Property is a Transfer of Going Concern (TOGC)

If you’ve held the property in question as an investment asset, and been collecting rent from an occupational tenant, it may be possible to avoid charging VAT on sale.

In order to meet the conditions for a ‘VAT Free’ transaction the following are required: -

• Your tenant needs to be expected to remain in the property following transfer of ownership, paying their rent to the person who has bought from you.
• The purchaser needs to be VAT Registered (or at least become compelled to Register for VAT as a result of buying the property) and have notified HMRC that they’re making an Option to Tax on the property being transferred, before money changes hands or Legal Title is conveyed.
• The purchaser has to confirm to the buyer – normally within the property sale contract/missive or on the TR1 – that their Option to Tax will not be disapplied or revoked following the transaction.

While it is technically permissible for a purchaser to apply for VAT Registration and notify Option to Tax on the morning of the transaction date, this does not give a seller much time to conduct due diligence and satisfy themselves that TOGC conditions have all been met.

In practice, it is better for the buyer to notify Option to Tax ahead of time and circulate the evidence so there are no ‘surprises’ on the day the transaction is due to complete. This should not unduly prejudice the buyer’s interests; if the transaction goes ahead, they have the same ease as others on day of completion, and if the transaction fails their Option to Tax has no practical effect as they don’t have an interest in the property.

What if the buyer is planning a residential conversion of the property?

Another circumstance where an Option to Tax can be disapplied because of a buyer’s intentions arises when a property developer or housing association acquires a commercial building with a view to converting it to residential dwellings.

If a buyer serves VAT form 1614D on you, you may be barred from charging VAT on the sale. If you receive the form before the sale contract is agreed then you are obliged to either continue the transaction as a VAT Exempt sale, renegotiate the price to account for any additional costs you suffer (see below), or withdraw altogether and find another buyer. If you receive the form after the sale contract is agreed, but before the transfer is actually completed, then you have the option to either accept the evidence and sell the property without VAT, or, hold the buyer to the agreed contract and insist they pay VAT on their purchase.

It is worth noting that normal VAT rules apply, and therefore if you continue with a VAT Exempt sale then any VAT you incur on selling costs can become irrecoverable. Any VAT ‘loss’ from this has to be weighed in the overall commercial context of the whole transaction.

What happens when selling land to a Housing Association?

Form VAT 1614D is only applicable to exempt VAT on sales of buildings. If your property is bare land being sold for development, you will be required to charge VAT in most cases.

The notable exception is bare land being sold to a Housing Association. In this case, the Housing Association can issue VAT1614G prior to agreement of the contract so that they acquire the land exempt from VAT.

Sale to a Housing Association is a similar basis to sale of a building to any developer: if the form is served before contracts are agreed the transaction has to be completed exempt from VAT, and if the form is presented after contracts are agreed the seller has the option to accept the change or hold the original bargain.

What if you reclaimed VAT but did not notify Option to Tax?

The final special circumstance covered here concerns the situation where you were able to recover VAT paid when you acquired the property because you initially occupied it as an owner. In that circumstance you would have been able to recover VAT on the initial purchase without notifying Option to Tax to HMRC.

If you subsequently change your use of the property by renting out the space, or decide to sell, you may want to consider notifying an Option to Tax to HMRC. You would consider doing this to protect yourself from a clawback of the VAT you originally reclaimed under the Capital Goods Scheme.

Essentially, you should take specific VAT advice before selling or renting the building if:

• your property cost more than £250,000 (including original acquisition and any subsequent extension/improvement works),
• you recovered input VAT on the initial purchase and/or subsequent development works to the building,
• and it happened within the last ten years,

as you may have a VAT compliance issue to manage.

Overview of selling/leasing a Commercial Property

When selling (or leasing) a commercial property, the existence of an Option to Tax on the land will largely dictate any VAT compliance requirements. Given that a property sale transaction is likely to be high value, it is often wise to take VAT advice as early as possible in the process.

If you have any questions or need VAT advice on commercial property, speak to an experienced advisor or our Associate Director, Iain Harris, who can point you in the right direction. Call him 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.