January 21, 2025
Full articleSales of completed residential properties are always exempt from VAT. Sales of commercial properties are exempt from VAT by default, however, the owner can choose to apply VAT if they wish.
Why would an owner choose to opt to tax their property for VAT?
By waiving their VAT exemption (also known as “opting to tax”) an owner is able to recover output VAT relating to the property i.e. VAT they have paid out to their suppliers or contractors.
How does an owner opt to tax to their property for VAT?
An owner can opt to tax their property for VAT charges at any time simply by deciding to do so. However, for that decision to be valid (i.e. to allow the relevant VAT charges to be included on quarterly VAT returns to HMRC), the decision must be:-
- Notified to HMRC in writing not later than 30 days after the decision was made
- Made before any taxable supplies of the property are made.
Do I need permission from HMRC to charge VAT?
No, provided the above criteria are met, the option to tax will have effect. However, if the decision is not notified to HMRC within 30 days, then the owner must make a belated notification to HMRC. That notification will not automatically be accepted, and HMRC must review and approve any application for late notification.
What is a taxable supply of commercial property for VAT?
A taxable supply of commercial property would be a supply of the property itself i.e. a sale or lease. After the option to tax is made, any sale price or rental charge for the property will be subject to VAT. In most (but not all) cases, a commercial landlord will choose to charge VAT on rents to their tenants.
If I opt to tax the property for VAT, am I obliged to charge VAT?
Yes, once the decision to opt is made, all supplies are subject to VAT. The owner will have to account to HMRC for VAT on all supplies made, whether they have charged the VAT to the buyer/tenant or not.
Does the option to tax apply to the property forever?
No. The option to tax is specific to the relevant owner who makes the decision to opt. A subsequent owner cannot charge VAT on the property unless they have also decided to opt to tax and made the relevant notification to HMRC.
An owner may be able to revoke an option to tax provided that they have not yet made any taxable supplies from the property.
How do I know if the property I am buying or renting is subject to VAT charges?
The VAT status of the property isn’t noted on the title deeds. You would need to request evidence of the relevant option to tax from your seller or landlord.
My landlord has opted to charge VAT on rent – do I have to pay?
Unless you fall in to certain very limited exempt criteria (e.g. you are a registered charity and your premises are used to deliver your charitable purposes in accordance with certain strict rules), it is not possible to disapply your landlord’s option to tax, and you will have to pay VAT on the rent.
The seller of my commercial property has opted to charge VAT – do I have to pay VAT on the purchase price?
If the property is being sold with vacant possession, the sale price will be subject to VAT unless the purchaser can certify that the property is being converted for use as a dwelling or other relevant residential purpose.
If the property is being sold with a tenant in place, then there is a letting business being carried on by the seller. That letting business can be transferred between seller and buyer as a “transfer of going concern” (TOGC) in which case there is automatic relief from the VAT charge. However, for TOGC relief to apply, both the seller and the buyer must a) be registered for VAT and b) have opted to tax the property for VAT. The letting business must also carry on in the same form after the purchase (i.e. the same lease must be in place. It cannot be surrendered or re-granted on completion of the sale).
We would always recommend a detailed examination of the VAT treatment by your lawyers and/or accountants. However, as an initial guide, the starting position for sales or letting of commercial properties is as follows:-
LETTING | ||
| Landlord has not opted to tax | Tenant VAT registered Tenant not VAT registered | No VAT payable on rent |
| Landlord has opted to tax | Tenant VAT registered Tenant not VAT registered | VAT payable on rent |
SALE WITH VACANT POSSESSION | ||
| Seller has not opted to tax – property vacant | Buyer VAT registered Buyer not VAT registered | No VAT payable on sale price |
| Seller has opted to tax* – property vacant
*and option has not been disapplied | Buyer VAT registered Buyer not VAT registered | VAT payable on sale price |
SALE OF INVESTMENT PROPERTY | ||
| Seller has not opted to tax – tenant in place | Buyer VAT registered Buyer not VAT registered | No VAT payable on sale price |
| Seller has opted to tax – tenant in place | Buyer not VAT registered | VAT payable on sale price |
| Seller has opted to tax – tenant in place | Buyer VAT registered Buyer has not opted to tax the specific property | VAT payable on sale price |
| Seller has opted to tax – tenant in place | Buyer VAT registered Buyer has also opted to tax the property | TOGC relief likely available so no VAT payable on sale price |
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| Gregor Duthie Legal Director, Real Estate | ||||
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The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any information contained in this blog, please seek solicitor’s advice from Gilson Gray.
