Commercial Property in City

VAT for Commercial Property

Following on from our article focusing on the VAT issues involved in construction of dwellings (Click here to read) I am continuing the same theme but this time considering some of the problems with VAT on commercial property.

I will start with a story, a true but sad story.

A company was in business selling electrical goods. They had been in the same premises for some time but business was good and the decision was taken to move to larger premises. The company spent 50k doing up the premises in order to make it more attractive to potential buyers. The cost would be mitigated as the business would be able to claim the vat back on the refurbishment, wouldn’t it?

Wrong! The business carried out the work and refurbished the property. As soon as it was completed the property was duly sold and they thought no more about it as they settled into their new premises. The following year they had a VAT inspection.

The question of the business premises always comes up in a VAT inspection. The questions asked are usually along the following lines:

  • Are the premises owned or rented?
  • Is any part of them let out?
  • Has the business sold any property in the last few years?

The VAT inspector, having received responses to these and other questions, assessed the business for the input tax incurred on the refurbishments of £10,000.

On what grounds was the assessment raised? The business made only taxable supplies so the input tax was related! An electrical retailer, surely?

Wrong! The business had used the services it had incurred to sell the old premises. The liability of property is exempt under group 1 Schedule 9 of the VAT act 1994.  The input tax incurred related totally to an exempt supply as the property was immediately sold.  The amount of input tax incurred was not below the threshold where VAT incurred can be treated as insignificant.  Unfortunately, this had not even registered with the directors.

If only they had checked this out with a VAT adviser!

How could this catastrophe have been avoided? Quite simply, by notifying HMRC that the company wished to opt to tax the property.  Schedule 10 of the VAT act 1994 allows businesses to opt to tax land and buildings under certain circumstances.  If it had done so, then the input tax would have been fully recoverable because the supply would have been taxable provided the notification had been made in advance of the sale.  VAT would have been due on the sale, but the buyer of commercial premises would be most likely to be able to reclaim the VAT charged.  The notification of an option to tax is made on a VAT 1614, available from the HMRC website.

There are circumstances where an option to tax would not be valid but these usually apply when the premises are intended to or have been used for other than taxable purposes, or where dwellings are being constructed.  An option to tax is also not always necessary - or desirable - as it means that all sales or leases of the building must bear VAT for the next 20 years at least.  This can also impact on stamp duty - so not a decision to be taken lightly or without really considering the future!

There are other exceptions to VAT law on land and property. If the company had constructed a new commercial building instead of refurbishing the existing premises, then the supply of the building would have been standard rated.  A building is classed as “new" until it is 3 years old, after that the liability reverts to exempt unless an option to tax is notified.

Schedule 9, group 1 of the VAT Act 1994, states that supplies of land and property are exempt, then goes on to list all the exceptions to this.  Some of the more common exceptions and supplies that are always standard rated are; new commercial buildings, car parking, sporting rights, self- storage and holiday lets including caravan pitches.

The moral of this story is that whether moving premises, acquiring premises, building premises or making any capital expenditure on property, please check your plans out with one of our VAT specialists first.

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