VAT on Commercial Property

Before renting commercial office space, it is essential to understand the implications of VAT and consider seeking professional guidance to navigate VAT-related matters.


What is VAT on Commercial Property?

Value Added Tax (VAT) is a tax imposed on the price of goods or services. Some items, known as zero-rated items, carry a 0% tax rate, including children’s clothes.

With commercial property, it is commonly assumed that such properties are exempt from VAT. However, it is important to note that this exemption can be waived when purchasing or leasing a property.

Be aware that this exemption does not always apply. In certain cases, the exemption may not apply if the transaction involves leasing or selling land. Furthermore, the exemption status can change if the business decides to apply VAT charges.

If a landlord or company acting as the landlord chooses to waive the exemption, it will levy VAT on the property. This additional charge enables the company to recover VAT costs associated with construction.


Opting to Tax for VAT Purposes

Some property owners opt to apply VAT at the standard rate to their commercial property, which is 20% for rent charges. They make this choice when leasing or selling the property.

It allows owners to recover VAT costs, including refurbishment expenses. However, not all businesses can recover VAT, such as those in insurance, health services, and financial or charitable sectors.

Businesses must inform HM Revenue and Customs (HMRC) in writing within 30 days to tax the property. This decision is valid for 20 years, even if the owner sells the property. The new owner can choose whether to tax the property or not within that period.

Once a company opts to tax, it must charge VAT on property-related supplies, including selling or leasing the property.


VAT Exemption

Commercial properties are typically exempt from VAT by default. If the buyer maintains the exemption, the property remains non-VAT elected.

The absence of VAT can benefit tenants, as they are not obligated to pay VAT. It also means landlords cannot reclaim VAT on their supply of the property.

However, there are exceptions to this rule. Properties constructed within the last three years are not exempt from VAT.


Transfer of a Going Concern

When a commercial property subject to VAT is sold, 20% VAT is typically added to the price. However, if the buyer intends to rent the property, it may qualify as a transfer of a going concern (TOGC).

The removal of VAT applies when the property has existing tenants or leases and the buyer continues to let the property after the purchase.

This option can appeal to buyers since a TOGC is not subject to VAT, relieving the purchaser from VAT payment.

To qualify as a TOGC, the buyer must make the same VAT decision as the seller before the property transfer date. For instance, if the seller chooses to tax the building and is VAT registered, the buyer must do the same. They are required to inform HM Revenue and Customs (HMRC) of this decision before the transfer date.


VAT on the Sale of New Commercial Property

New commercial properties under three years old are subject to the standard rate of 20% VAT. There is no VAT exemption for these properties.

When purchasing a new commercial property to rent it out, it is common for buyers to choose VAT taxation to assist in recovering the VAT paid.

VAT on commercial property is a complex subject. It is advisable to seek professional assistance when exploring this area.

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Frequently Asked Questions

With VAT on properties, landlords are responsible for paying the tax, which they then apply to their tenants’ rent. Landlords must notify HM Revenue and Customs (HMRC) if they choose to tax the property.

There are two methods to avoid paying VAT when buying commercial property: not opting to tax the property or obtaining a transfer of a going concern status.

Not opting to tax the property exempts you from VAT during purchase, but you cannot reclaim VAT costs related to construction.

Obtaining a transfer of a going concern status requires following the same VAT decisions as the previous owner and continuing to rent the property.

The standard rate of commercial property VAT is currently 20%. However, it is optional for the landlord to charge VAT. If the property remains exempt, neither the landlord nor the tenants are required to pay VAT. Opting for exemption means the landlord cannot recover VAT on other expenses like refurbishment.

Certain items deemed essential by the government are exempt from VAT. These include:

  • Financial services
  • Physical education
  • Selected medical treatments
  • Postal services
  • Sporting activities

Please note that this list is not exhaustive. For more comprehensive information, HM Revenue and Customs (HMRC) provide additional details on this matter.

If the property opts for VAT, the buyer is responsible for paying VAT upon purchase. However, if the buyer is VAT registered and intends to use the property for business purposes, they can subsequently reclaim the VAT.

Generally, supplies related to commercial properties, such as interest, licenses, and sales of freehold properties over three years old, are exempt from VAT. Leases for commercial properties can also fall under this exemption.

However, landlords can opt to tax the property for VAT, making it taxable for 20 years and no longer exempt.

If the transaction qualifies as a transfer of a going concern, it falls outside the scope of VAT and is not exempt.

Zero-rated land must meet specific criteria to qualify. It includes being charitable or residential land under certain circumstances. The following types of land can be zero-rated:

  • Property converted from commercial to residential use.
  • Newly constructed property.
  • Significantly reconstructed listed building.
  • The property was vacant for ten years and then renovated.

Additionally, it must be the initial grant of a major interest, such as a lease longer than 21 years or a freehold.

It is important to note that zero-rated goods are different from VAT-exempt goods. Zero-rated goods are still subject to taxation, despite being taxed at a rate of 0%.

The standard rate of VAT, currently at 20%, applies to most products and services as they are classified as standard-rated items.

VAT is categorised into three rates: standard rate, reduced rate, and zero rate. Reduced-rate items have 5% VAT, including children’s car seats. Zero-rated goods have 0% VAT.

Certain items, like postage stamps, are exempt from VAT.

If the landlord does not choose to waive VAT exemption, the tenant is not required to pay VAT on their rent. It also means that even if the tenant is VAT registered, they cannot reclaim VAT from the property.

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