Commercial property transactions are a business investment. These assets fall squarely within the definition of goods and services, meaning their purchase can be subject to VAT. However, VAT functions differently for commercial property purchases depending on the nature of the building, as well as what you are going to use it for.
In this blog, we’ll be covering everything you need to know about VAT on commercial property purchases. It includes information on opting to tax, transfers of going concern, and what costs can be recovered through tax.
Why is VAT included in commercial property transactions?
Value added tax (VAT) is calculated based on the value of certain goods and services. In the UK, it applies to:
- Supplied goods and services
- Goods and services made in the UK
- The supply is taxable, or the goods are made by a taxable person
- Supply made in the course of, or furtherance of a business
These definitions are met by many aspects in the process of buying a commercial property. For instance, houses located in the UK are considered a good made in the UK. The supply of services for commercial properties includes any instance where there is a ‘consideration’. This refers to any actions taken in consideration of the property and the activities that will be conducted therein. These supplies can attract VAT regardless of monetary transfer, such as exchanges of interest.
VAT exemption on commercial properties
Generally, most commercial property sales and purchases are exempt from VAT. This is because the base VAT rate (20%) is only compulsory in the purchase of new or incomplete commercial buildings. For properties older than three years, it is up to the property owners to decide whether they are going to charge VAT. In either case, it will apply to the goods and services they are providing through the sale of the property.
Exemptions apply to any exchange of interest in a commercial property, as well as rights or licences to occupy the property. This means that while VAT exemptions are beneficial to buyers, they can hurt those that supply the property for commercial use.
Choosing to tax and reclaiming VAT
Landlords and commercial property vendors will typically opt to tax the sale of a commercial property when they can recover a majority of the cost. In commercial property purchases, VAT can be recovered on any costs that relate to the property. A common example is refurbishment or repairs to an existing property. Another instance where it can be beneficial to tax is when there is an intention to transfer the property as part of ‘Going Concern’. We’ll go into more detail on this later.
What can VAT be claimed on?
In most cases, VAT will not be paid on the purchase price of a commercial property. However, any business that charges VAT on its activities can claim VAT back on costs associated with the property. This includes:
- Costs incurred during the purchase of the property, along with lease premiums and rents.
- The cost of extensions, fittings, and refurbishments.
- Legal fees.
- Maintenance costs such as utilities, cleaning, and day-to-day repairs.
As a business, unclaimed VAT translates directly to losses. This means opting to tax your activities is often advisable for purchases classed as standard-rated supply, as 20% VAT is applied. On the other hand, choosing to tax has different implications for commercial properties bought for the purpose of being rented out. This is because the tax charge is transferred to tenants through rent. Unless they can also claim back the costs of the VAT, it could dissuade renters.
Once the decision to tax a commercial property purchase has been accepted by HMRC, it’s typically binding for 20 years. As such, professional legal advice is recommended when considering whether or not to charge VAT.
Transfer of Going Concern
A transfer of going concern is a type of commercial property transaction that has exemption from VAT. It refers to a sold set of assets that can be run as a business. The sale will be classed as a transfer of going concern (TOGC) if the buyer intends to continue using the property for the same type of business. TOGC applies to a commercial property purchase if:
- The property itself functions as a business by generating income.
- The property transfer is part of an entire business purchase.
- Assets are transferred by a taxable party to a transferee that is registered for VAT, or whose registration becomes immediate following the transfer.
Unlike other transactions, both the buyer and the seller must agree to opt to tax the property. This is also a requirement if the property is standard rated. Afterwards, HMRC must be notified before the date of supply for the transaction to maintain its TOGC status. It is the responsibility of the seller to ensure VAT treatment is upheld, thereby avoiding penalties and guaranteeing the recovery of tax.
Commercial conveyancing solicitors Tyneside
Toomey Legal are expert property solicitors Consett, providing both residential and commercial conveyancing services. We pride ourselves on being a modern and friendly firm. The result is that when you choose us, you’ll be getting expertise that’s responsive, professional, and practical, all at a fixed rate. Contact us today for a quote.
*Toomey Legal are dedicated conveyancing specialists. As such, we do not conduct property surveys, give tax advice or mortgage advice.