Recovering VAT on commercial property purchases

I’ve had a number of queries recently from clients and vatexchange visitors asking for advice about recovering VAT on property purchases, particularly when the property has been acquired by someone other than the VAT registered business.

Because the law on VAT and property is so complicated, I always recommend that you take formal advice on these issues. This is why:

• The amount of money involved in buying property is large and you need to protect your interests by obtaining proper professional advice.

• The rules about VAT and property are very complex and can’t be explained in a short forum reply.

• Each set of circumstances is unique and there are any number of variables that could affect how you decide to proceed.

The rules about VAT and property are extremely complicated and the information given in this article is only for general guidance. You should take formal advice or ask HMRC for assistance to deal with the VAT issues on any specific property transactions

You should also discuss the subject with your accountant and solicitor, as there will be other tax, accounting and legal issues to consider. Your accountant and solicitor know your circumstances better than I do and should be able to help with most VAT and property issues. They will be able to let you know if you need specialist advice, in which case you can contact your existing VAT advisor, or you may wish to refer the issue to me for formal advice.

Typical scenarios

In one case concerning a VAT registered husband and wife partnership, the wife had to purchase the property in her name as the partnership couldn’t get the mortgage to buy the property. In another case, a director of a limited company had to take out the mortgage and purchase the property in his name even though it is the company who will occupy the premises.

In both cases, VAT was paid on the purchase of the property and the purchasers wanted to know if they could recover the VAT and if so, how to do it.

Recovering VAT on commercial property purchases

The basic rule is that the VAT can only be recovered by the purchaser if they are registered for VAT and using the property to make taxable supplies.

So in the case of our partnership, the wife is the only person who is entitled to recover the VAT or in the case of the limited company, the director. And only then if she/he is registered for VAT and using the property to make taxable supplies. And this is where things get complicated.

In practice, when properties are owned by a separate legal entity to the trading business, they will typically grant a lease or licence to enable the trading partnership/company to occupy the property in return for a commercial rent. However leasing commercial properties is exempt from VAT. This means that in principle it isn’t possible for property owners to recover VAT on the purchase of properties or any other costs, such as repair, conversion or maintenance.

Opting to tax

However it is possible for the property owner to recover VAT on the purchase of the property if they register for VAT and “opt to tax” the property. This means that their supplies of the property become taxable rather than exempt and they charge VAT on the rent for the property to the partnership.

The rules on opting to tax are complex and there is a very short introduction to the subject in my article on the forum here More detailed information can be found in the HMRC VAT Notice 742a: “Opting to Tax land and property”, which is on the HMRC website.

There are some situations in which it is not possible to opt to tax or when the option is “disapplied”. Even if the option to tax can be made, there are very strict rules about when and how to make an option and if you get just one of these wrong, it can mess everything up!

Limited or not?

Finally, I’ve been asked if it would be possible or advisable for the property owner to transfer the property to a limited company so that the individual doesn’t bear the risk of owning the property.

In principle, it doesn’t make any difference for VAT purposes whether or not the property is owned and opted by a sole proprietor or limited company – the VAT rules apply regardless of the legal status of the owner. So there are no specific VAT reasons for transferring the ownership to a limited company.

However, there may be other tax, funding or legal issues to consider, so again you should take advice from your accountant and solicitor. And transferring it to a limited company (which I will call the property company) would add an extra set of transactions into the mix which would increase your costs, such as legal costs and possibly Stamp Duty Land Tax.

A further set of transactions.......

What this means is that the original purchaser, ie the partner or director, would have to sell the freehold to the property company which would then lease the property to the partnership or trading company.

In order to recover the VAT on the original purchase, the partner/director would still have to register for VAT and opt to tax the property, then charge VAT on the sale of the freehold to the property company. The property company would register for VAT and opt to tax the property and would enter into the occupational lease with the partnership.

So transferring the ownership to the property company would simply add extra work for no perceivable VAT benefit.

Transferring a property rental business?

Finally, there is also another important factor to consider. If the original purchaser (ie the partner or director) had already granted the occupational lease to the partnership or trading company before selling the freehold to the property company, then the sale of the freehold to the property company may qualify as the “transfer of a going concern” (TOGC).

This would be the sale of a property rental business as a going concern and in these cases, the sale of the property would not be liable to VAT even if the vendor has opted to tax the property.

The TOGC rules are particularly complex when applied to property sales and the transactions would have to be carefully managed to ensure that the parties involved don’t end up with unnecessary VAT costs or other costs. Further information on this subject is in VAT Notice 700/9/2008: Transfer of business as a going concern, which is on the HMRC website.

But if there are other non-VAT reasons for transferring the ownership of the property to a limited company, then it might be worth considering. Again, this is something to discuss with your accountant and solicitor.

In conclusion.......

Yes, it is possible to recover VAT paid on the purchase of a property. But as you can see from this article, the rules are complex and I would strongly advise you to take formal advice as and when you are buying a property so that you get things right!

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