Commercial property is exempt from VAT which means that no Vat will be charged on the property sold and at the same token no Vat will be recovered on any costs incurred i.e. improvements, however there are some exemptions, e.g. commercial property less than three years old is standard rated .

An owner can “ opt to tax” land (for the purposes of VAT, the term ‘land’ includes any buildings or structures permanently affixed to it, you do not need to own the land in order to opt to tax),.

Once you have opted to tax all the supplies you make of your interest in the land or buildings will normally be standard-rated, and you will normally be able to recover any VAT you incur in making those supplies.

Exercise of the option is a long term commitment as the option cannot be revoked for 20 years once exercised, therefore careful consideration should be given and professional advise sought from a suitably qualified advisor as the merits of such an election. When considering buying or taking a lease of property it is important to find out the VAT status at an early stage. If VAT is payable there could be serious financial implications that you may not have factored into your budget.

The outright sale of a building or the grant of a lease on one can be a zero-rated, standard-rated or an exempt supply. The VAT treatment depends on the type of building and the type of supply, i.e. as for the type of building, it needs ascertaining whether it is a commercial property or a dwelling, and, for the the type of supply, we must distinguish between a sale of the freehold or the grant of a lease.

There are some exemptions, as pointed out above Commercial property less than three years old is standard rated (20%), however an owner can elect to waive the exemption from VAT and choose to charge VAT on a property.

Input VAT cannot be recovered on an exempt property, exercising the option may make commercial sense if VAT has or will be paid on construction costs, repairs or other works, it then follows that once the option to tax is exercised, VAT must be charged on any sale or letting (there are few exemptions). Some businesses cannot recover VAT in full (e.g. insurance, finance, education, government departments).

SDLT would be charged on any lease or sale, and this SDLT is payable on the VAT inclusive rent or purchase price and therefore increases the tax significantly.

If potential tenants/purchasers can recover VAT, VAT is less likely to be an issue. the tenant/purchaser may recover the VAT paid as input VAT and the requirement to pay VAT will be a matter of cash flow only, and we can assist with the bridging of the VAT and introduce you to a specialist lender advancing short terms loans for the VAT due on commercial property purchases, thus our clients benefit from a fast, reliable VAT loans with the capability of completing in as little as 5 working days. Our service doesn’t stop with the advance of the loan, we continue working with the clients to manage their VAT recovery, typically recovering 45 days after completion. Fast recoveries reduce the time clients’ VAT loans are outstanding, and with interest calculated daily and no early repayment charges this reduces the cost of clients’ VAT loan.

Finally, it is important to note that “the option to tax” is personal and does not automatically pass with the building, a buyer of an opted property must also exercise the option to tax if it wishes to charge VAT on rent/future sale proceeds and also retrospective options to tax are not permitted.

CategoryTax Advice
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