VAT on property transactions - introductory guide

VAT on property transactions is a very complex area, and great care needs to be taken to ensure that all parties to a property transaction fully understand the implication of VAT on their transaction. This guide is a basic introduction and as such we cannot emphasise enough the needs to take detailed advice on any property transaction including tax implications.

If you would like advice regarding VAT on a commercial property call us on 0203 816 9303 for a free, no obligation initial chat with one of our legal advisors who would welcome the opportunity to discuss it with you.

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How does VAT apply to property transactions?

The vast majority of commercial property transactions will not be subject to VAT; this includes the exchange of interests in, rights over or licences to occupy commercial properties. 

The following supplies concerning commercial property transactions would be exempt from VAT:

  • All leases, assignments, surrenders, reverse surrenders or licences to occupy any interest in land or buildings.
  • Sales of freehold commercial property or civil engineering works more than three years old or sales, leases or licences of all residential or charitable property.

However, there are certain exceptions. 

VAT can be applied to commercial property transactions where the property involved is  new build, or where there  has been an election to charge VAT; this is usually the case if renovations or refurbishments have taken place within the property, and there is a need to neutralise the VAT costs. 

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Who is liable for VAT on property transactions?

VAT is generally the liability of the supplier, rather than the person to whom the supply is being made. In the case of property transactions that are subject to VAT, this will usually be the seller or the landlord of the property in question. 

Whenever a seller or landlord supplies a property that is liable for VAT, they must account for this supply to HM Revenue and Customs. HMRC requires suppliers to account for VAT on a quarterly basis, unless the nature of their transaction allows for a shorter time period.

Electing to charge VAT on property transactions

As noted above, it is possible to choose to charge VAT on certain commercial property transactions that would otherwise be exempt. 

Suppliers can often elect to charge VAT on commercial property transactions in order to recover any VAT incurred on goods and services that have been supplied to the business previously; this is also known as input tax. 

If a supplier wishes to charge VAT on a commercial property transaction, then there are certain restrictions that must be adhered to. 

The supplier must elect to change the commercial property transaction from “exempt” to “taxable” before the date the transaction takes place, and must inform HMRC of their intentions in writing within 30 days of this date. If the supplier has previously made a commercial property transaction that was exempt from tax, they must first obtain permission from HMRC if they wish to elect to charge VAT.

Not all suppliers will elect to charge VAT on commercial property transactions as it can reduce the marketability of their property, particularly when supplying to those who cannot recover their VAT, eg: banks. 

Transfers of going concerns

Generally, if assets are being sold together in the form of something that is capable of being run as a business (i.e., a “going concern”), and the buyer intends to use those assets to carry on the same type of business, then this commercial property transaction may l be classed as a Transfer of Going Concern (TOGC), and as, such, will be outside of the scope of VAT, and no VAT will be payable. 

A commercial property transaction will be classed as a TOGC if the property is transferred as part of a sale of the whole business, or if the property is a business in its own right, e.g.: an investment business.

Strict requirements need to be complied with, if such a transaction is to be properly treated as a TOGC and professional advice ought to be sought to protect the parties. Requirements include  ensuring that the contract governing the transaction provides that it is to be treated as a TOGC, both buyer and seller are vat registered, both buyer and seller have elected to charge vat, and both buyer and seller use the property for the same business purpose both before and after the transaction.

If you would like to discuss VAT on a commercial property or any other legal issue in relation to a commercial premise, please call us on 0203 816 9303 for a free, no obligation initial chat with one of our legal advisors who would welcome the opportunity to discuss it with you.

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