Whether you’re an experienced investor or a first-time landlord looking to dip your toe into the market for the very first time, VAT can be a complex and often confusing issue.
In this article, we’ll look at some of the ways in which VAT can affect the sale, purchase price and rental income of commercial property and provide some useful help and guidance on how to get the most out of your investment.
VAT Exemption on Commercial Property
Generally speaking, the sale or lease of a commercial property is exempt from VAT. That means you don’t have to pay input VAT on any purchase price or charge VAT on any subsequent sales or lettings.
The only exceptions are:
If you’re buying a property that is less than three years old, in which case VAT is applied at the standard rate of 20%.
You elect to charge VAT on your property.
The second example may seem like an unusual step, but if a property is exempt from VAT you’ll be unable to recover VAT incurred on any related costs.
And if you’re buying a brand new property or embarking on a large-scale renovation project these could be fairly substantial.
That’s why, in certain circumstances, investors choose to waive their exemption and charge VAT on their property.
Opting to Charge VAT
As a vendor or a landlord, you have the option to charge VAT on your property, allowing you to recoup certain losses on things like purchase price, renovation costs or ongoing expenses. While in some instances, this may prove the best, most lucrative option, it’s not something to be taken lightly.
Once you opt to charge tax on your property, the decision is set in stone, and with very few exceptions this can only be revoked following a 20-year term.
With that in mind, it’s imperative to think long and hard before making such a far-reaching decision.
Here are some key points to consider If you decide to tax your property:
You’ll be able to recover input VAT on the purchase price of any new commercial property that is less than three years old - as much as £100,000 on a £500,000 building.
You’ll be able to recoup VAT for all renovations and refurbishments, along with any professional fees and ongoing expenses.
On the other hand:
Once you elect to tax your property, you’ll be required to charge VAT on any subsequent rental, lease or sale, which may discourage potential buyers and tenants, making the property harder to market.
If you’re thinking of purchasing a commercial property, it’s worth remembering that the option to tax is tied to the vendor rather than the property itself.
Once a building changes hands, it’s up to the new owner to decide whether or not to tax the property.
Transfer of Going Concern
If you’re buying or selling a commercial property with tenants already in place or with an existing lease, this may be classed as a Transfer of Going Concern (TOGC), meaning the purchase price and any subsequent rent will be exempt from VAT.
This applies even if the property is less than three years old or the current owner has opted to charge VAT on the building.
There are certain conditions that need to be met in order for a commercial property to qualify as a TOGC:
The building is being sold with an existing lease and/or tenants in situ and the buyer intends to honour that lease and continue to run the property as a rental business.
Where the seller is VAT registered and has opted to charge VAT on the property the buyer must do likewise, informing HMRC of his or her intentions by the date of transfer.
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