An overview of key issues including ‘option to tax’.
The sale or lease of a commercial property can be standard rated, zero rated, exempt or even outside the scope of VAT depending on its nature.
Commercial properties can be used for various purposes such as:
- to use in the business for operating activities
- lease and capital appreciation
- to develop and sell.
Exempt supplies means that neither a landlord (purchaser) nor a tenant (occupier) would have to pay VAT. It may include:
- 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.
Standard-rated supplies of land include:
- sales of freehold or commercial land or a building or civil engineering work that in either case is less than three years old from the date of completion or is incomplete. In order to recover VAT charged on the acquisition, it is most likely that the buyer would elect to charge VAT on rents and on a future sale of the property (unless it qualifies as a TOGC)
- grants of miscellaneous interests in or rights over land or interests in land which are specified in the VAT legislation, including car parks, fishing rights, caravan pitches.
Zero-rated supplies of land only include residential or charitable land and it applies only in certain circumstances. The supply of land will be zero-rated if it is the first grant of a major interest (that is, a freehold or a lease for longer than 21 years) of residential or charitable land that is either:
- newly constructed
- converted from commercial to residential
- renovated after being empty for 10 years
- a listed building that has been substantially reconstructed.
What is Option to Tax (OTT)?
‘Option to Tax’ means an election to charge VAT ie making an exempt supply a taxable supply. When as an owner or developer you are choosing to opt to tax the land and building, then you must charge standard-rate VAT on the sale or lease of your property. You are able to recover the VAT incurred on the purchase or development of the land or on professional services associated with the sale. If a property is subject to option to tax, the purchaser of such property has to apply for OTT themselves; otherwise they will not be able to claim the VAT.
If you decide to opt to tax the property, then you must notify HMRC of your intentions in writing within 30 days of this decision. Additionally this decision must be taken before any exempt supplies are made in respect of the property. HMRC permission would be required for any previously made exempt supplies in respect of a particular property or piece of land, if you wish to elect to charge VAT on future supplies in relation to that land/building. Relevant forms to apply for option to tax can be found on HMRC’s website.
Once notified to HMRC, Option to Tax lasts for 20 years and is largely regarded as irrevocable. It is very important to make a long-term right decision for this. If the market sector is likely to include significant numbers of buyers who themselves cannot recover VAT as they make exempt supplies then electing to charge VAT can have a negative impact on the ability to sell or lease a property.
Building for own use in the business
If VAT is incurred on the purchase of land or property which is being entirely used for making a taxable supply then the full amount of VAT can be recovered. However, if the property is used for making mixed supplies, ie taxable and exempt, then there could be a restriction and capital good scheme may be used to maximise the recoverable amount. The percentage of taxable use has to be monitored for any claw backs. Full details can be found in VAT Notice 706/2.
Transfer of a going concern
If the property being sold is capable of being run as a property rental business, and the buyer intends to carry on the same type of business, this commercial property transaction may then be classed as a Transfer of Going Concern (TOGC).
A TOGC is outside of the scope of VAT, and so no VAT will be payable. If the land and building would be standard rated (due to an existing option to tax election by the seller) for TOGC relief, the buyer must notify HMRC of his decision to opt to tax before the date of the transfer.
HMRC manual guidance
HMRC VAT notice 742
Article from ACCA In Practice