Understanding Value Added Tax (VAT)

VAT is a tax intended to be borne by consumers of goods or services. Where a taxable person supplies goods or services in the normal course of their business, they are required to pay VAT to HM Revenue and Customs (“HMRC”) on those supplies. 

VAT on Commercial Property Transactions

The VAT treatment of commercial property can appear, and is, a complex area of tax. Generally, as a starting position, all commercial property is an exempt supply for VAT purposes, however, there are exceptions to this rule.  

Option to tax (a standard-rated supply)

In some circumstances commercial property owners choose to “opt to tax” a commercial property. This means that they voluntarily charge VAT on supplies relating to the property, including the sale of property or the leasing of a property by the landlord to a tenant (i.e. VAT will be payable on top of the purchase price/rent).

To apply for an option to tax for VAT purposes, an application is made to HMRC.  

Reliefs 

Some transactions relating to commercial property, which would usually be a supply for VAT will benefit from a relief, meaning that all, or some of the VAT for the transaction may not be payable. 
 
For example Transfer of Going Concern relief (“TOGC”) is available where the property being transferred includes the sale of a business. To qualify for TOGC relief there are strict criteria that need to be met and tax advice should be sought to ensure all the criteria are met. 

In such circumstances, HMRC will consider the transaction to be zero-rated.  This means that no VAT will be chargeable on the transaction.  

Summary 

Given the complexity of VAT and the potential financial impact if you get it wrong, it's advisable for individuals and businesses involved in commercial property transactions to seek advice from tax professionals.

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of advice.