VAT and Commercial Property

Jonathan Corsie

Jonathan Corsie

Tax Assistant Manager

Some of the highest value transactions that businesses incur are often related to the acquisition or disposal of commercial property.  

Determining the correct VAT treatment for these transactions is complicated enough to keep teams of VAT advisers in gainful employment and requesting specialist advice at an early stage is highly recommended.

The consequences of getting the VAT treatment wrong can be considerable.

Why is the VAT treatment so complicated?

VAT is a fact specific tax. The individual circumstances of each transaction need to be confirmed and analysed before the VAT position can be determined.

Consider for example that the same disposal of a commercial property could be either:

  1. Exempt of VAT
  2. Subject to VAT at the standard rate, or
  3. Outside the scope of VAT  

These are dependent upon specific factors including, for example:

  • The age of the property - the sale or long lease of a new (or less than three years old) commercial property is typically subject to VAT at the standard rate.
  • Whether the seller has notified HMRC of their decision to opt to tax the property - the sale of a commercial property more than three years old that has been opted to tax by the seller will also typically be subject to VAT at the standard rate. In the absence of an option to tax, the same transaction will typically be exempt of VAT.
  • Whether the transaction is a 'transfer of going concern' (TOGC) - regardless of the age of the commercial property, and whether it has been opted to tax or not, if TOGC conditions are satisfied, the transaction will be outside the scope of VAT. This results in no VAT being included on the sale and often results in the most beneficial VAT outcome for all parties.

What are the main VAT considerations for the seller?

The seller of a commercial property has responsibility to apply the appropriate VAT treatment to the sale. Failing to do so can result in a future VAT liability and potential VAT penalty payable to HMRC.    

A sale may be concluded on the understanding that it will constitute a TOGC without full testing of the underlying conditions. Should HMRC subsequently challenge the TOGC treatment, they can assess the seller for any VAT falling due on the sale. 

The seller may be able to pass such a future VAT cost over to the buyer, if the buyer is still trading and the terms of the sale contract allows for this. 

It is important therefore that suitable VAT clauses are included the sale documents to protect the seller’s position in relation to potential future VAT liabilities, especially those that may result from the buyer not fulfilling their contractual obligations.   

What are the main VAT considerations for the buyer?

The buyer of a commercial property has no entitlement to reclaim VAT that has been charged incorrectly by the seller. 

If it is only discovered some time after the sale that VAT has been charged incorrectly, it may result in the buyer being required to repay the VAT to HMRC in the event of an HMRC visit.  If the sale contract is silent on such an outcome, there may be no recourse available from the seller leaving the buyer with an unwelcome and unforeseen cost to bear.

Any VAT cost included in the sale of land or property will also result in a higher Land and Buildings Transactions Tax (LBTT) cost or the buyer. LBTT payable is based on the sale price including VAT and represents an absolute cost, it is not recoverable.

Even if there is no VAT cost included in the sale, e.g., if it has been concluded as a TOGC, it is equally important for the buyer to ensure that the VAT clauses in the sale documents will protect their exposure to potential future VAT liabilities.

How can we help?

Our team of experienced VAT advisers at Johnston Carmichael can support you through every step of complex land and property transactions. 

We can provide you with the information you need to make informed decisions that will help you reach the most beneficial VAT outcome for your business.

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