Commercial Property: Is VAT payable on property purchases and leases?

 

This is a fundamental question for both buyers and tenants of commercial properties as it has a big effect on a business’s cashflow. It can even determine how much stamp duty land tax maybe payable. Therefore, potential buyers and tenants need to know the answer early on in a transaction to make sure they pay the correct amount of tax.

No business wants to have an issue with HMRC. The bad news is the answer is not straightforward. However, we have extensive experience in dealing with VAT when acting for buyers and tenants of commercial property, as well as other issues, so can help buyers navigate this tricky area.

Before we look at the general principles, it is important to say we are not qualified to give tax advice. Therefore, we always recommend you speak to your accountant as part of any commercial property transaction as they can give you the specialist tax advice needed. However, we do work closely with accountants to make sure VAT is dealt with correctly. We are happy to recommend a suitable accountant if necessary.

Generally VAT is not payable on the purchase price/rent unless the seller/landlord has formally decided to charge VAT, notified HMRC of their decision and HMRC has acknowledged that decision.  This is known as an Option to Tax (sometimes called an Election to Waive the Exemption). If the Option to Tax has been made, then VAT will usually be payable at the Standard rate. I say usually because as with all taxes there are reliefs and exemptions that may apply meaning no VAT is payable.

A common example is where the property is being sold as part of a business, known as a Transfer of a Going Concern (TOGC). The definition of a “business” is not straightforward and applies to someone unexpected transactions. For example, it can apply to a building being sold with a tenant in place but there are strict conditions that need to be met. The key is to speak to an expert in the early stages to ensure the transaction is structured in the best way possible.

Most businesses can recover any VAT paid the cash flow position but needs to be considered, especially when paying a large amount of VAT. Beware, not all businesses can recover VAT.

A final point to bear in mind is that Stamp Duty is calculated on the purchase price/rent plus any VAT payable; effectively paying tax on top of tax.

So the key points to note are:-

• If there is an option to tax VAT may be payable on the purchase and leases of commercial;

• VAT is not always payable even if the other party have opted to tax e.g. transfer of a going concern and

• VAT and property is a complex area so seek advice from an accountant and expert lawyers such as Lawson West early.

 

Contact Us here for more information or assistance

Russell Dowling, Senior Solicitor
Lawson West Solicitors, Leicester

 

This article is not intended to be legal advice and cannot be relied upon or applied to any set of circumstances. For further guidance, please contact Lawson West Solicitors Limited.

 

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