VAT on all commercial property rentals and purchases is complex and, as such, it is advised that you seek expert assistance if you are not well-versed in the complexities of of this aspect of commercial property management.

In general, there are four main principles to consider for commercial VAT purposes:

VAT exemption: What is it?

As a general rule, the sale or rental of a commercial property such as a shop, warehouse, office or restaurant is exempt from VAT, meaning neither the individual purchasing the property or the prospective tenant would have to pay VAT.

The VAT exemption also applies to:

• The exchange of interests
• Rights over and /or licences to occupy commercial premises

Whilst this VAT exemption is beneficial for a purchaser, it also means that the vendor or landlord is unable to recover any VAT on related costs, which may be significant.

There are also some exceptions to this rule, as the standard rate of VAT – currently 20% – is applied to commercial property transactions in the event that:

• The property is new (anything less than three years old)
• The vendor or landlord has chosen to charge VAT, for example if the property has been renovated or refurbished and they wish to recover some of the costs incurred

Opt to tax

A commercial property owner can opt to charge VAT at the standard rate when they sell or lease their property. If they choose to do so, they must charge VAT on everything relating to the property.

They are also then able to recover any VAT charged to them on costs relating the property. Opting to tax can therefore provide a substantial benefit in some circumstances, such as in the event that the property has been subject to extensive refurbishment, with its associated costs.

It is important to bear in mind that some companies are unable to recover any VAT incurred on costs. These are known as ‘VAT adverse businesses’ and include:

1. Charitable sectors
2. Financial
3. Insurance
4. Health and welfare

As such, it is important to consider the potential market for a commercial property prior to making a decision regarding the option to tax, as it may be difficult to sell or lease the property if the market is mainly comprised of businesses who are unable to recover VAT.

If a landlord or vendor does opt to tax, there are certain procedures and restrictions they must adhere to. HMRC must be notified in writing within 30 days of the decision to opt to tax. This must be done every time the commercial property is leased or sold, as the option to charge VAT does not ‘follow the property’. Once made, the decision lasts for 20 years and is largely irrevocable.

Transfer of going concern (TOGC)

If the commercial property is sold with tenants in place or it has an existing commercial lease agreeement, the vendor would usually be required to charge VAT as the standard rate. However, if the prospective buyer intends to continue leasing the property rather than occupy it themselves, the sale is classified as a ‘transfer of going concern’, which is exempt from VAT.

This is an appealing option for a buyer, although there are certain conditions that must be met. The buyer must match the seller’s VAT position on the date of transfer, meaning if the seller is VAT registered and has opted to tax the commercial property, the buyer must do the same and ensure they have notified HMRC prior to the date of transfer.

VAT on new build commercial property

Any commercial property that is less than three years old is classified as new and is liable to the standard rate of VAT.

The prospective buyer of a new commercial property who intends to rent it out is therefore likely to opt to charge VAT on rents going forward and on a future sale of the property (unless it qualifies as a TOGC) in order to recover the VAT charged on acquisition.

With increasing property values and strict HMRC penalties in the case of non-compliance with VAT, mistakes can be extremely costly.

For advice and assistance in all matters of commercial property sales, purchases and management, get in touch and our expert team will be happy to help you.