Finance, Tax & Admin

A Guide to VAT on Commercial Properties

Business Advice | 22 December 2022 | 1 year ago

There’s a lot of information out there about charging and paying VAT on commercial properties, but a lot of it is confusing. There are situations when you might charge VAT on a commercial property, and those when you are unlikely to. Knowing the ins and outs of commercial property VAT is key if you are planning to buy, sell or rent for your business.

VAT Exemption on Commercial Properties

When you lease or buy a commercial property, you are usually exempt from paying VAT. This means that the tenant or person buying the property doesn’t have to pay VAT on it. Though this is a positive and does reduce the cost of buying or renting a commercial property, it also means that the landlord or buyer cannot recover the VAT on all related costs.

Opting to Charge VAT

Commercial property owners have the option to charge VAT at 20%, but there are implications that come with charging VAT on commercial properties. If you choose to charge VAT, you must also charge VAT on the supplies that relate to that property. This means charging all tenants and buyers VAT also. This is something that a lot of businesses do, but it’s not the best course of action for everyone.

For example, some businesses cannot afford to recover the VAT incurred, such as charities or healthcare services. This is why it’s important to think about who you are planning to rent or sell the property to, as not all businesses will be able to take it on knowing that VAT has been added. Your target rental and buyer markets should be factored into your decision to charge VAT. There are circumstances when opting to charge VAT is beneficial, such as when costly refurbishments have been carried out. If you do decide to charge VAT, you need to notify HMRC in writing and this is something that’s hard to change further down the line.

TOGC – Transfer of Going Concern

TOGC, which stands for Transfer of Going Concern, is the sale of a business and any assets that relate to the business. This sits outside of being charged VAT. Opting out of VAT for a commercial property can make a business more attractive to buyers of the business, as it’s an asset that isn’t registered for VAT. By meeting certain conditions, the sale or rental of a property can be considered neither a supply of goods or a supply of services.

VAT for Sale of New Commercial Property

There are different VAT rules for the sale of a new commercial property. If a commercial property is less than three years old, it will be liable for VAT. This means that buyers of the property are likely to charge VAT to tenants, unless it qualifies as TOGC.

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