It's A VAT Trap, and You've Been Caught

25th July 2019 by

Apologies, as a drummer with a musical hobby, I couldn't resist the 'Boomtown Rats' reference, although now I am showing my age of course. 

On a serious note however, there are a couple of deals I have been involved with in recent times where through no fault of the buyer or interested party who usually employ, pay a fee to, and rely upon the professionals, the VAT issue has become problematic at too later stage despite the best efforts of trying to explain its implications on day 1. 

There are various deselection processes, scenarios, and or even specific sectors that can circumnavigate the payment of VAT on the purchase price of commercial property, not least selling as a going concern, but it is complicated stuff and not to be left to the last moment. 

As a quick guide and rule of thumb, it is more straight forward when converting a property to a single residential dwelling i.e via a 1614D, but not so simple elsewhere in the buying and selling process, hence why the buyers lawyer is always asked by the sellers representatives, to confirm the VAT position at the very earliest stage of any conveyancing process. 

Commercial property is being more and more continuously opted in to the VAT system. Any buyer of a commercial property that has already been opted in to VAT, is going to have to consider any VAT on the purchase price. Most purchasers will opt their property into the VAT system, so that they can recover it from 'HMRC' at a later stage, along with any business related costs and expenses later associated, consumed, or used at that premises. Once the property has been opted in, VAT remains applicable, meaning that when the owner comes to sell the property they will most likely elect it for VAT on sale, with potential new owners having to pay VAT on the purchase. This cycle will continue until a purchaser chooses not to opt the property in, and forgoes reclaiming the VAT as per the aforementioned deselection system/s. Every purchaser of commercial property should be aware of and prepared for this, agents make every attempt to explain the implications in respect of VAT, as does the valuer for the finance house if applicable. Nobody expects a buyer to have all the answers, hence why we recommend professional advice from your nominated solicitor at the earliest convenience. 

People are sometimes also caught out on 'Option To Tax' 

Commercial property is almost always ‘opted in’ to the VAT system, otherwise it is ‘exempt’ and VAT can’t be reclaimed. When a property has been opted in to tax, the vendor must charge VAT on all supplies they make in relation to that property, including the sale of the property itself. Owners opt in to VAT to allow the recovery of VAT from HMRC when applicable. There are obvious benefits in doing this, particularly if there is development work to be carried out as the VAT can be recovered, i.e refurbishments, trades people, materials, goods and services, change of use projects, etc. In most circumstances, the option to tax can only be removed when the property is sold, meaning it does not stay attached to the property unless the next owner keeps it opted in, or their solicitor nominates it for deselection, opting it out ! 

Simply, as a purchaser, you would need to take advice about making the option to tax, but more importantly you will have to be careful when purchasing a property that has already been opted in to tax (the majority). In these cases, VAT may need to be paid on top of the purchase price itself.

Also, keep in mind, that If you are using debt funding (mortgage) to pay for the purchase, the majority of mortgage lenders will not cover this amount, albeit there are some VAT bridging loan companies that exist. 

(VAT currently stands at 20%)

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