A Guide to VAT on Commercial Properties

Understanding VAT rules can be complicated at the best of times, so it’s no surprise that there’s often confusion as to when you might or might not charge VAT on a commercial property. Getting to grips with the details is key if you’re looking to buy, sell or rent for your business.

VAT Exemption on Commercial Properties

The lease or sale of a commercial property is usually exempt from VAT i.e. the tenant or person buying the property doesn’t have to pay VAT on it. Whilst 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.

Opting to Charge VAT

Commercial property owners have the option to charge VAT at 20% (currently the standard rate), but there are implications that come with charging VAT on commercial properties.

By opting to charge VAT, a landlord or vendor usually needs to charge VAT on all supplies which relate to the property, which means charging all tenants and buyers VAT. This does mean, however, that landlords or vendors can recover VAT charged in relation to the property. Whilst this is good for some businesses, it isn’t the right course of action for all.

If a business expects to incur expensive refurbishments, then being able to reclaim the VAT on those costs can prove to be a real advantage. However, many businesses such as charities or healthcare services simply cannot afford to recover the VAT incurred, so it is not appropriate (or realistic) to opt to tax. It’s therefore very important to consider the type of business or industry you are planning to rent or sell to before deciding whether to opt to tax.

If you do decide that opting to tax is the right decision, then HMRC will need to be notified in writing. This is usually an irrevocable decision, hence why it is so important to consider your target market.

TOGC – Transfer of Going Concern

A Transfer of Going Concern (TOGC) is the sale of a business and any assets relating to that business, and sits outside the scope of VAT (i.e. there is no VAT charged on the sale). Conditions to be a TOGC:

• It is a transfer of a whole business as a going concern (i.e. with a tenant in situ)

• There is no change in trade

• There is no significant break in trade

• The transferee is, or will immediately become VAT registered after the transfer

By not opting into VAT for the commercial property, the sale of the property may be more attractive to potential buyers of the business, as there is no VAT on the asset.

VAT for Sale of New Commercial Property

Selling a new commercial property comes with its own set of VAT rules, which are defined by the age of the property. If a property is less than three years old at the date of sale, then it is liable for VAT. Buyers of the property are more likely to opt to tax in order to recoup the VAT on acquisition, and therefore charge VAT to tenants, unless it qualifies as a TOGC.