Before buying or renting commercial property, business owners and investors must consider whether a transaction will be subject to Value Added Tax (VAT) on the sale price or the rent. It is a consideration that should be taken into account at the outset of the transaction as it can potentially have a significant impact on the overall purchase price or the amount of rent paid on a lease of the property, especially for businesses and companies which are not registered for VAT.
What is VAT?
VAT is a tax on supplies of goods and services made by a taxable person in the course of furtherance of a business. It is designed to be borne by the financial consumer and is charged on all goods and services commercially provided, including those provided to businesses. In some instances, it may include commercial property.
For the purposes of VAT, commercial property is neither residential nor charitable property.
What to consider?
As a general rule, a purchase or a lease of commercial property is exempt from VAT. There are, however, some exceptions to this rule. These include, amongst others:
- a sale of commercial property where the seller/landlord has opted to charge VAT
- a sale of a freehold interest in an uncompleted commercial building
- a sale of commercial property built less than three years before the sale
Has the seller/landlord opted to charge VAT?
Commercial property sellers and landlords have an option to opt to charge VAT at the standard 20% rate. This allows them to recover VAT charged on any costs related to the property.
A decision to charge VAT covers the entirety of a property and binds all companies within the same VAT group. It is generally irrevocable, except in some limited circumstances such as when a building is demolished, or within six months of making a decision to opt to charge VAT, subject to no supplies of the property having been made and additional conditions having been met.
This means that the buyer or the tenant must find out from the seller or the landlord whether they have opted to charge VAT before entering into any agreement. Otherwise, the prospective price of the sale or the amount of rent to be paid may be 20% more expensive. This could potentially make what previously appeared to be a commercially attractive deal no longer viable.
However, even in these circumstances, VAT may not be payable if the transfer is considered to be a transfer of a business as a going concern (TOGC).
What is a transfer of a going concern?
TOGC is a sale of a business including assets, which must be treated as neither a supply of goods nor a supply of services. It is, therefore, outside the scope of VAT.
HMRC has provided that it considers that a sale meets the conditions of the supply of goods or services that is exempt from VAT being outside the scope of VAT if:
- The assets are sold as part of a ‘business’ as a ‘going concern’
- The buyer intends to use the assets to carry on the same kind of business as the seller
- Where the seller is a taxable person, the buyer must be a taxable person already or become one as the result of the transfer
- Where only part of a business is sold it must be capable of separate operation, and
- There must not be a series of immediately consecutive transfers
Subject to the above conditions being met, the purchase or the lease will not be VAT chargeable. A good example of TOGC is a purchase of a let office building or a GP surgery.
Knowing whether the seller or the landlord has opted to charge VAT or whether the transaction is a TOGC is important. If the buyer or the tenant cannot recover VAT, they may have to pay 20% more than initially estimated. Whatever the transaction, therefore, it is important to first obtain high quality legal advice.