The sale or lease of a commercial property is generally exempt from VAT, which means that the purchaser or tenant does not have to pay VAT. However, commercial property owners have the option to charge VAT at the standard rate (currently 20%) when selling or leasing their property.
When a landlord or vendor opts to tax property, they usually need to charge VAT on all supplies which relate to that property, including rentals or sales. Landlords can, however, recover VAT that has been charged in relation to the property.
Interaction of VAT with Property Transaction
Property Transaction can be standard rated, zero rated, or exempted from VAT.
The following property transactions are standard rated:
These are not exhaustive list.
For the property transaction to be Zero rated, the following conditions have to be fulfilled:
The grant of any interest in or right over land or of any licence to occupy land other than the transactions discussed above for Standard rated, zero rated or reduced rated is exempted from VAT.
VAT on Commercial Property
As discussed above, the Value Added Tax (VAT) on the commercial property transaction is either standard rated, opt to tax at standard rate or exempted from VAT.
We will now be discussing in detail each situation.
What is the standard VAT rate on commercial property transactions?
The sale of new commercial properties (completed within the last 3 years) is subject to VAT at 20%. For properties over 3 years old, VAT is generally exempt unless the seller has opted to tax the property. Buyers intending to rent out the property can opt to tax to reclaim VAT. If the sale qualifies as a Transfer of a Going Concern (TOGC), it may be exempt from VAT.
Option to Charge VAT
Commercial property (which is not considered as new) owners have the option to charge VAT, but there are implications that come with charging VAT on commercial properties.
When a vendor or landlord makes an exempt supply of a property, they are unable to recover VAT incurred on related costs. These can be significant. If a landlord or vendor opts to tax a property, they must usually charge VAT on all supplies they make relating to that property.
Therefore, they must charge VAT on the rentals or sale . However, the landlord can also recover VAT charged to them on costs related to the property.
Note: Once the option to tax has been made, it must be notified to HMRC within 30 days of being made.
Revocation of Option to Tax
- Can be revoked within the first 6 months with certain conditions being fulfilled, the significant one being repayment of any input tax deducted as a result of making the option.
- Where no interest has been held for 6 years from the date of option to tax.
- Option can be revoked after 20 years from the date of opting to tax.
VAT Exemption
Under any other case the lease or sale of a commercial property is usually exempt from VAT, which means that the tenant or person buying the property doesn’t have to pay VAT on it.
While this is generally a positive overall (reduces the cost of buying or renting a commercial property), the landlord or buyer cannot recover the VAT on all related costs.
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Avoiding VAT on Commercial Property
VAT on the purchase of the commercial property can be avoided by obtaining the Transfer of Going Concern (TOGC) status for the property.
The basic conditions for TOGC are:
- The transfer must be of a business (or part of a business) as a going concern, with business capable of separate operation by the buyer
- The buyer must be VAT registered or become registered at the time of transfer
- The buyer must also opt to tax; the option must be in place by completion
- The buyer must continue or intend to continue the similar type of business activity
- There must not be significant break in the normal trading pattern before or immediately after the transfer
- There must not be a series of immediate consecutive transfers of the business
Note:
For Transfer of a Going Concern (TOGC) purposes, properties with tenants are considered part of a property rental business, even if tenants haven’t occupied the property or are in a rent-free period. As long as the property is sold with the benefit of an existing lease, the transaction qualifies for TOGC treatment. This applies even if only part of the property is leased.
However, if the lease has been surrendered before the sale, the property rental business has ceased, and TOGC does not apply. In such cases, VAT at the standard rate will apply to the sale instead of the TOGC exemption.
Let us understand this with an example:
Stephen is interested in purchasing a commercial property currently leased to David by the landlord, with the intention of continuing to rent it to David. As long as David remains the tenant, no VAT will be charged when the landlord transfers the property to Stephen.
However, to benefit from VAT relief, Stephen must be VAT registered and opt to tax the property before the sale is completed. Additionally, he needs to notify the seller that he has made this election to opt to tax the property.
Read our article on " VAT on Property Explained " for a comprehensive understanding and practical insights."
To Wrap Up!
In conclusion, understanding VAT on commercial property in the UK is crucial for both buyers and sellers. The standard rate of VAT, currently 20%, is typically applied to commercial property transactions when the seller has opted to tax, or when new commercial properties are being sold or leased.
However, certain transactions, such as the sale of land or buildings that are not new, are usually exempt from VAT. This exemption can be overridden by the seller 'opting to tax', which allows them to charge VAT on the sale or lease, but also enables them to reclaim VAT on their own costs.
The landscape of VAT on commercial property is complex and can significantly impact the financial aspects of a property transaction.
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