Potential VAT Savings

The "new" VAT regime applying to property transactions since 1 July 2008 is still in its infancy due to the small number of property transactions effected since its introduction. The principal objective of the regime change was to simplify the system and, to a certain extent, the new regime is easier to understand and operate. However a matter which is not generally appreciated in relation to the new regime is the degree of options available which can impact on the VAT cost of property transactions. Where a purchaser or lessee is not entitled to fully recover VAT there are significant potential savings to be made from a thorough consideration of the VAT treatment.

Entities which are generally not entitled to recover VAT incurred on expenditure

This includes banks, building societies, credit unions, insurance companies, Government Departments, local authorities, sports bodies, educational establishments, charitable organisations and the health sector.

Acquiring freehold or freehold equivalent interest

If the property is more than two years old there may be scope to purchase the property without VAT applying. This could result in a 13.5% saving. There may be a need to compensate the vendor for a potential "capital goods scheme" VAT clawback but this is likely to be much less costly than VAT applying to the purchase price.

Acquiring leasehold interest

You should carry out a cost comparison exercise between the payment of VAT at the standard rate (currently 21% but likely to increase to 22% in 2012 and to 23% in 2013) on the rent and the payment of a "VAT compensation amount" to the landlord in lieu of paying VAT on the rent.

Where VAT applies you should cap the period for which VAT can apply to the rent to the minimum period required in order for the landlord to avoid a "capital goods scheme" VAT clawback.

You should also review any incentives to be provided by the landlord from a VAT efficiency viewpoint. In general a rent free period will be the most efficient where VAT is going to apply to the rent.