The Bishop Fleming VAT team have had a flurry of cases recently assisting clients with options to tax that have been improperly documented.

If you buy a new commercial property, one 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 property and this happens most frequently when you are buying from a commercial landlord rather than the owner-occupier of an office or a factory unit.

Generally, if it is your intention to operate a fully VATable trade from the property, you can recover the VAT 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 get that VAT back if you opt to tax the property and charge VAT on the rent.

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 but that is not the case – an option only applies in respect of supplies made by the person opting and a new owner starts from scratch.

The rules regarding options are very prescriptive, with documentation and notification requirements and strict time limits as well as a raft of anti-avoidance rules. Failure to notify an option within 30 days means that the option is ineffective, one cannot back-date an option and opting after rent has been charged without VAT can block the recovery of the VAT on the purchase, which will be a large figure!

We have successfully obtained HMRC’s approval of late notification in a number of recent cases but the rules for such approval are also very 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.

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

Furthermore, even if you can recover the VAT, you have to finance that cost for some months, and there may be a Stamp Duty Land Tax charge on the VAT, a charge that itself may not be insignificant, especially if the VAT lifts the property price into the next tax band. We may well be able to help you to structure the purchase in such a way as to avoid the VAT charge altogether, even if you are intending to trade from it yourself.

For more information, please contact the Bishop Fleming VAT teamWendy Andrews, or Robert Bailey – or your usual Bishop Fleming adviser.


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