VAT on Commercial Property - the largest VAT saving you will ever make?

29th August 2019

Following the re-issue of the article  Vat on commercial property – the largest VAT bill you will ever pay , I have revised and updated the following article.

This runs through the risks of not taking the appropriate action at the right time to ensure you can recover the VAT payable on a purchase of a building when the vendor has made an option to tax it. The issues remain as valid as ever.

Imagine that you are just about to buy a commercial property on which the vendor has made an option to tax and proposes to charge VAT at 20% on top of the not inconsiderable asking price. My previous article covered the actions necessary to ensure that you can recover the VAT charged.

But what if you cannot recover that VAT whatever you do, or can only recover part of it?

And what if you can get it back, can you afford to finance that VAT cost for the 3 to 6 months it may take to recover it?

Or is there a significant additional Stamp Duty Land Tax bill arising because of the VAT?

Is there anything that can be done to prevent the VAT being charged in the first place?

Checklist

The good news is that there may be, and the following questions should be asked – and advice taken accordingly:

1. How old is the vendor’s option?

If it is less than 6 months old or more than 20 years old, the vendor may be persuaded to revoke the option. It is possible that there will be a consequence to him in doing so in the form of a VAT claw-back by HMRC. Indeed, that is very likely for a new option, but the cost of compensating the vendor for his VAT loss may be less than your expected VAT loss, so there may be a deal to be done.

There are HMRC conditions for any revocation, so it may not be possible for the vendor to revoke an option, especially, again, for a new option.  But it is worth asking.

2. Is the property wholly commercial?

An option cannot apply to dwellings or property designed, adapted and intended for relevant residential purposes. We occasionally see attempts by vendors to apply VAT to the whole of a property when it includes an owner’s flat or similar residential aspects. In that case, the sales price should be apportioned, and the dwelling element should be treated as VAT exempt.

Care is needed over the definitions and actual use. The apportionment must be fair and reasonable and there may also be agreed proportions for such accommodation. For licensed premises, an allocation of 10% to an owner’s flat is the norm, although that is not as firmly applied as it once was.

3. Do you have grounds to “disapply” the vendor’s option?

This may be possible if:

  • a building is to be converted for use as a dwelling or dwellings;
  • a building is to be used by a charity for its actual charitable activity (i.e. not as a charity shop or for administrative offices);
  • a Relevant Housing Association intends to build new dwellings on the land (after any necessary demolition): or
  • an individual intends to build a dwelling on the land for his own occupation.

As for a revocation (see 1 above) there may be adverse consequences for the vendor, so the process of disapplication must take place before the price is settled – usually before exchange of contracts, but possibly before agreeing heads of terms. This is essentially to allow the vendor to amend his price, or even withdraw from the deal, rather than face an unexpected loss after the deal is apparently settled.

But, as for the revocation situation, the vendor’s potential claw-back may be less than your potential VAT saving and there may be a deal to be done

4. Are you buying a property as part of a larger business?

If what you are buying is not just a property but a business, which you will continue to operate, the transaction may be a Transfer of a Going Concern and so VAT is not chargeable at all. However, there are very strict conditions and anti-avoidance regulations surrounding VAT charges on properties within such a transfer and great care is needed. Again, some of these conditions need to be met prior to agreement of terms.

The right advice

The fact that a vendor may have opted to tax is not the end of the story – there may be something you can do other than just pay the tax – but the conditions for all of the above, including the documentary requirements, are detailed and strictly applied, and the timing of any action required to invoke them is critical.

The amount of tax at stake is likely to be very significant so it is vital to obtain the appropriate advice and do so early. Leave it too late and there may be nothing that you can do.

For more information, please contact the Bishop Fleming VAT team – Wendy Andrews, or Robert Bailey – or your usual Bishop Fleming advisor.

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