VAT on Commercial Property: Can you reclaim VAT?

VAT on Commercial Property: How to reduce costly VAT mistakes

If you buy a new commercial property that is less than three years old, VAT will be due on the purchase price. VAT will also be due if the seller has “opted to tax” a commercial property, and this happens most frequently when buying from a landlord rather than the owner-occupier of an office or factory unit.

Generally, if it is your intention to operate a fully VATable trade from the property, you can recover the VAT incurred on purchase, but if your intention is to let the property, either to a third party or to a fellow group company, you will only be able to recover that purchase VAT if you opt to tax the property and charge VAT on the rent.

Property is not opted for life

There is a common misconception that a property is opted for life, and we have seen a number of cases where the buyer has not exercised an option in the belief that the property already has an option in place.

However, this is not the case. An option to tax applies to the opter’s interest in the property, not the property itself, and so a new owner needs to make their own option to tax. In the absence of a new option, the property will revert to its default VAT exempt status and if the buyer will let it, there will be no right to reclaim any of the VAT.

Know the rules

The rules regarding options are very prescriptive, with strict documentation and notification requirements and firm time limits as well as a raft of anti-avoidance rules. Failure to notify an option within 30 days means the option is ineffective (this was extended during covid but is now back to 30 days). HMRC have updated their process on Option To Tax Notifications whereby they no longer reply with an acknowledgement letter, and you only receive an automated email acknowledging receipt. Due to this change, your notification email and attachments, and the auto-reply email from the HMRC Option To Tax unit must be retained on permanent file as your evidence of your Option To Tax, so its is very important to do this in the right way and include all relevant details.

One cannot backdate an option, and opting after VAT exempt rent has been charged can block the recovery of the VAT on the purchase, which will be a large figure.

We have successfully obtained HMRC’s approval of a late notification of an option in a number of cases over the years, but the rules for such approval are detailed and it is by no means certain that such a claim will be successful without a lot of evidence to support the original intention.

Proving the original intention to opt is not the same as backdating it, as you can never backdate an option, but is proving to HMRC that an option to tax was made but was not notified correctly. And if there is the slightest slip up in the process, HMRC is within its rights to refuse the notification, disallow the purchase tax and charge interest and penalties.

Take advice before committing

With such a large amount of VAT inevitably at stake, it clearly pays to get it right first time, and not rely on a conditional rectification later.

The lesson to learn from this is to take advice when you are considering buying a commercial property – before you exchange contracts. The VAT at stake will be huge – probably the largest VAT bill you will ever pay – and so it is crucial to be sure that you have the right to recover that VAT and have all the documentation in place to do so.

Structuring the transaction

Even if you can recover the VAT, you have to finance that cost for some months, and there may also be a Stamp Duty Land Tax charge on the VAT, a charge that itself may not be insignificant.

We may well be able to help you to structure the purchase in such a way as to remove the VAT charge altogether, a subject dealt with in the companion article ‘VAT on Commercial Property - the largest VAT saving you will ever make?’