VAT exemption on commercial property
As a general rule, the sale or lease of a commercial property is exempt from VAT, which means neither a purchaser nor a tenant would have to pay VAT.
This means that when a vendor or landlord supplies a property that is exempt from VAT, they are unable to recover any VAT incurred on related costs.
And there are certain exceptions to this rule: VAT at the standard rate is applied on new commercial properties i.e. less than 3 years old, or where the vendor or landlord has elected to charge VAT. The latter may occur where a property has been refurbished or renovated, and the vendor or landlord is looking to recover the VAT costs associated with that work.
Electing to charge VAT
Commercial property owners can opt to charge VAT at the standard rate (currently 20%) when selling or leasing their property. If they do so, they must charge VAT on all supplies they make relating to that property – but they are also then able to recover VAT charged to them on any costs related to the property. See article Opting to tax
If a supplier wishes to charge VAT on a commercial property transaction, there are certain restrictions and procedures that they must comply with.
The supplier must decide to opt to tax the property, and notify HMRC of their intentions in writing within 30 days of this decision. It is important that the decision to opt is taken before any exempt supplies are made in respect of the property. If the supplier has previously made exempt supplies in respect of a particular property or piece of land, they will need to get permission from HMRC if they wish to elect to charge VAT on future supplies in relation to that land/building.
Once a supplier has notified HMRC of their option to tax, that decision lasts for 20 years and is largely regarded as irrevocable, so making the right long-term decision is crucial.
It should be noted that the option to charge VAT does not follow the property, so the next purchaser or tenant will need to decide whether or not to opt to tax and this will depend on their use of the building.
If the property being sold is capable of being run as a property rental business (for example, being sold with tenants in place or with the benefit of an existing lease), and the buyer intends to carry on the same type of business, this commercial property transaction may then be classed as a TOGC – see article Transfer Of a Going Concern
A TOGC is outside of the scope of VAT, and so no VAT will be payable – which could be an attractive option for buyers in these circumstances.
The sale of a ‘new’ commercial property – i.e. a property that is less than three years old – will be liable to VAT at the standard rate. In these situations, the buyer of a new commercial property who intends to rent it out is likely to elect to charge VAT on rents going forward and on a future sale of the property (unless it qualifies as a TOGC) in order to recover the VAT charged on an acquisition.