Commercial property

A guide to commercial transaction VAT



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VAT in relation to commercial property can be very complex and can throw up some nasty surprises if you're not prepared. BloomSmith VAT Funding presents a brief guide to things you should know about VAT when it comes to purchasing a commercial property, and what you should be asking your VAT adviser.

Commercial property

These days, almost all commercial property is continuously opted in to the VAT system. Any buyer of a commercial property that has been opted in to VAT is liable to pay VAT on the purchase price. Most purchasers will opt the property in to VAT so that they can recover it from HMRC. Once the property has been opted in, VAT remains applicable, meaning that when the owner comes to sell the property, the new owner will have to pay VAT on the property as well. This cycle will continue until a purchaser does not opt the property in and forgoes reclaiming the VAT. Every purchaser of commercial property should be aware of and prepared for this.

Option to tax

This is where people get caught out. Commercial property is almost always ‘opted in’ to the VAT system, otherwise it is ‘exempt’ and VAT can’t be reclaimed. When a property has been opted in to tax, the vendor must charge VAT on all supplies they make in relation to that property, including the sale of the property itself. Owners opt in to VAT to allow the recovery of VAT from HMRC when applicable. There are obvious benefits in doing this, particularly if there is development work to be carried out as the VAT can be recovered. In most circumstances, the option to tax can only be removed when the property is sold, meaning it does not stay attached to the property unless the next owner keeps it opted in.

As a purchaser, you would need to take advice about making the option to tax, but more importantly you will have to be careful when purchasing a property that has already been opted in to tax. In these cases, VAT may need to be paid on the purchase price, on top of the purchase price itself. If you are using debt funding to pay for the purchase, it is worth bearing in mind that the majority of mortgage lenders will not cover this amount (VAT currently stands at 20%). BloomSmith was set up to provide this VAT payment service.

VAT exempt

Although increasingly rare, some commercial properties are not VAT elected, so a buyer will not have to pay VAT. This gives them less to worry about on the day of purchase. However, if they are expecting to incur considerable VAT related costs, such as building works, they will not be able to reclaim the VAT from HMRC. If as the new owner, they then choose to opt in to tax, VAT will become applicable. They will then be able to recover VAT in the normal way. However, this will happen post-acquisition and so VAT on the purchase price wouldn’t apply.

Transfer of Going Concern (TOGC)

An important qualification, which allows a buyer to avoid paying VAT on a property purchase, is known as a ‘Transfer of a Going Concern’ or TOGC. A property purchase qualifies as a TOGC when the property is sold with an existing lease or tenants in place, and the purchaser intends to continue with the tenants or lease. If this is the case, no VAT is applicable at purchase. However, TOGC status is subject to certain conditions and is not automatic, so this is an area where specialist advice is necessary and extra care should be taken when dealing with properties with tenants or leases in place. It is not a given that the sale of the property will be VAT exempt.

If you want to talk about bridging your VAT requirement, please get in touch with us at BloomSmith VAT Funding. We can be reached online, by email, vat@bloomsmith.co.uk or over the phone, 020 3488 3411 for any questions you may have.

The information set out in this guide is provided by BloomSmith Ltd as a general guide to VAT principles only and BloomSmith accepts no responsibility for any reliance placed on this information. If you are concerned about VAT matters which may affect you or your business, you should seek full professional advice from a suitably qualified accountant or VAT expert.

 

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