Choosing the right VAT scheme is an important step for small business owners and can have a considerable...
VAT on commercial property purchases can be a highly complex field, which often leads to confusion over possible obligations.
While expert advice should always be sought in these instances, our guide to VAT on commercial property aims to introduce you to some of the key points you should to consider.
Do I have to pay VAT on commercial properties?
No. The sale or rental of a commercial property is exempt from VAT and that applies to both owners and tenants so the tenant doesn’t pay VAT on rent and the owner doesn’t pay VAT if he or she sells the property. However, an owner or landlord may elect to charge VAT.
Why would an owner or landlord elect to charge VAT?
If the owner or landlord has incurred costs relating to the commercial property, for example, for refurbishment, then charging VAT is a good way to recoup these costs.
If no VAT is charged, it means that the owner or landlord is unable to recover any VAT charged on this refurbishment. But if they elect to charge VAT on the sale or rental, then they can reclaim the VAT from HMRC.
Are there exceptions where VAT is charged on commercial properties?
Yes. Standard rate VAT is applied to commercial properties that are less than three years old. For this reason, owners of commercial properties that are less than three years old, often elect to charge VAT to their tenants in order to recover the VAT costs they incurred at the point of purchase.
What are the rules around electing to charge VAT?
Commercial property owners can elect to charge VAT at the standard rate, which is currently 20%. They must then charge the standard rate of VAT to all supplies relating to that property. They can then reclaim any VAT they’ve been charged which relates to that property.
How do I elect to charge VAT on a commercial property?
HMRC must be notified, in writing, of your intention to charge VAT, within 30 days of your decision to do so. Once HMRC has been notified and confirmed receipt of the notification, it lasts for twenty years and is generally irrevocable so you must ensure that you are making the right decision before notifying them.
If the building changes ownership, the decision to charge VAT doesn’t remain with the property and the new owners can reverse the decision if they wish.
What factors should be considered when deciding whether or not to charge VAT on a commercial property?
The types of tenants a property is likely to have will play a large part in determining if charging VAT is a good idea or not. Certain organisations, such as charities or financial organisations, are not able to reclaim VAT so charging VAT to them would be an extra cost and would put them off becoming tenants.
What is ‘Transfer of a Going Concern (TOGC)’?
This term refers to a commercial property which is sold with an existing rental business in operation. For example, the property already has tenants who will remain in the property under the new ownership.
In a TOGC sale, the existing VAT conditions have to be met and maintained by the buyer. So, if the previous owner elected to charge VAT, the new owner must do likewise. In this example, HMRC would still need to be notified of the decision to charge VAT and this must be done by the date of transfer of ownership.
The above guide answers some of the top questions regarding VAT payments on commercial properties, including when to pay, why an owner/landlord would charge VAT, what the rules and exemptions are, and what a TOGC is.
The rules surrounding charging VAT on a commercial property can be complex so it’s best to seek guidance. If you’d like any more information or have any questions, please feel free to get in touch with our experienced team who will be happy to assist you.