Value-added tax (VAT) is an unavoidable but complex consideration when it comes to commercial property. If not understood correctly it can prove to be troublesome – particularly at the later stages of transactions. VAT can impact the final value of a transaction and affect both the seller and purchaser – the seller must ensure they are charging VAT when required and the purchaser must ensure that the VAT they are paying is correct.
Once we are clear on the building blocks of VAT, the anomalies arising on a case-by-case basis will become more easily identifiable at the outset of a transaction.
When is VAT applicable?
Section 4 of the Value Added Tax Act 1994 may be seen as a basic ‘checklist’ for when VAT is applicable.
In order for VAT to be charged there must be:
(1) A supply of goods and services
In the context of Section 4, the definition of goods and services also extends to land, and therefore, commercial property.
(2) Which is made within the United Kingdom
Any commercial property found in the UK will be deemed to be “within the United Kingdom,” regardless of where the seller or purchaser may be located.
(3) Which is a “taxable supply”
A “taxable supply” requires some form of consideration. The scope of what is meant by “consideration” includes both monetary and non-monetary considerations. Moreover, an “exempt supply” is not a “taxable supply” for the purpose of VAT. More information on exempt supplies can be found below.
(4) Made by a “taxable person”
Where the “taxable supply” of goods and services made by a person surpasses £85,000 (the current VAT registration threshold), this person will require to become VAT registered and will thus be classed as a “taxable person”. It is worth noting that if a person is solely making “exempt supplies” then they cannot become VAT registered.
(5) In the course or furtherance of a business carried on by them
While there are various definitions deriving from case law and statute, a good rule of thumb when deciding whether something is “in the course or furtherance of a business”, is to ask the question of whether the said business is receiving something in return for the goods or services it has provided. If the answer is “yes” then it will likely fall under the “business” umbrella.
Which type of VAT?
Once Section 4 has been dealt with, the VAT in relation to commercial property can then either be zero rated (0%), standard rated (currently 20%) or exempt. In some instances, such as “transfers of going concerns” (detailed below), the transaction will fall outwith the reach of VAT.
Most commercial property transactions will tend to be exempt from VAT, but this knowledge can often lull parties into a false sense of security.
Key considerations
(a) Non-exempt commercial property
Not all commercial property transactions will be exempt from VAT. One important exception for parties to be aware of is where a commercial property has been newly built in the last three years. In this case, VAT will be charged at the standard rate (currently 20%).
Another notable exception falling within the non-exempt bracket are holiday lets. With the recent raise in popularity of ‘staycations’, many property owners have taken the opportunity to transform their property into holiday accommodation. Should an owner be contemplating using their property for holiday lets they should consider the potential transition from the exempt to non-exempt category as early as possible in the process.
(b) Opting to tax
Even in situations where VAT is not payable, commercial property owners (or tenants) may choose to “opt to tax”. After opting to tax a commercial property, all of the supplies made in respect of that property by the party who has opted to tax will ordinarily be charged at the standard rate.
Opting to tax can be a wise choice for some parties as it allows for input VAT to later be recovered. However, it is important to note that opting to tax is not a ‘one size fits all’ manoeuvre. For instance, there is a chance that a commercial landlord who has opted to tax could drive away otherwise interested tenants if these tenants are not taxable persons (as they will be unable to reclaim VAT).
This option also brings a potentially dangerous degree of permanency. After 6 months of opting to tax, the party will be unable to turn back for a period of 20 years. The option will attach to any extension of the property and will persist even where the property is demolished.
(c) Transfer of going concern (TOGC)
A TOGC relates to the sale of whole or a substantial part of a business. As mentioned, VAT is not chargeable in respect of TOGCs. Despite the common misconception, this means that the option to tax discussed above will also not apply. However, there may be related elements of a business, perhaps those owned by a third party, which are not deemed to be part of the business and VAT will therefore be payable in relation to these elements. Care must be taken to ensure different elements in a sale are categorised correctly to avoid unwanted mishaps towards the close of a transaction.
Specialist Commercial Property Lawyers, Edinburgh
Murray Beith Murray Partner Bill Meldrum is Head of Commercial Property and is a specialist in commercial property law.
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