VAT and Commercial Property

	Definition	Tax rate	Outcome for Seller/Landlord	Outcome for Buyer/Tenant
NEW	Completed within 3 years prior to sale	Standard rate = 20%	Will be able to recover input tax incurred in developing the site. If using SCPC, need to incorporate condition A1 in Part 2 SCPC to charge VAT in addition to the agreed purchase price (SCPC 1.1.4 – sale doesn’t constitute a VAT supply)	If tax sensitive, may be reluctant to purchase. If not tax sensitive, can offset the input tax paid on purchase with their own output tax. NB – paying VAT in addition to purchase price may buyer’s financial arrangements.
OLD P62 Civil Lit	Completed over 3 years prior to sale	Exempt, but option to tax	Seller has option of recovering input tax on repair or refurbishment. The problem with opting to tax is that VAT would have to be charged on the purchase price on the sale and if buyer is a Co., it may not be able to recover any VAT (because it does not make VAT able supplies in the course of its business). The buyer might thus object to seller opting to tax or seek a reduction in the purchase price to compensate it for the irrecoverable VAT. The seller will have to weigh up the benefit of recovering the refurbishment VAT against the potential loss of sale proceeds (or even the sale itself). If using SCPC, need to incorporate condition A1 in Part 2 SCPC to charge VAT in addition to the agreed purchase price (SCPC 1.1.4 – sale does not constitute a supply for VAT purposes)	If tax sensitive, may be reluctant to purchase if option to tax is exercised Should try and negotiate provision that Seller will not opt to charge VAT before completion. If Seller is charging VAT, should negotiate that the price be inclusive of VAT
ANY COMMERCIAL LEASEHOLD PROPERTY	When lease is granted	Exempt, but option to tax	If option made after grant of the lease, s89 VATA 1994 = rent to be increased by the amount of VAT, unless clause in the lease making the rent inclusive of VAT. If option made before the grant of a lease, s89 will not apply. Landlord will need clause allowing VAT to be added to lease.	Should try and negotiate provision that Seller will not opt to charge VAT before completion. If Landlord is charging VAT, should negotiate that the rent be inclusive of VAT
TRANSFER OF A BUSINESS AS A GOING CONCERN	E.g. Seller is letting building and buyer intends to continue the letting business	Tax is not chargeable	Has to be VAT registered	Has to be VAT registered Must opt to tax the property [OUT OF LPC SCOPE] Must notify HMRC prior to the tax point for the restrictions [OUT OF LPC SCOPE]

EXAMPLE

Seller		Buyer
Input Tax (Green arrow)	200k – Sale Price	Input Tax (green arrow)	500k – Rent
Output Tax (purple arrows)	<50k> – Original Purchase Price	Output tax (purple arrows)	<200k> – Purchase Price
Output Tax (purple arrows)	<50k> – Refurbishment	Output tax (purple arrows)	<200k> – Purchase Price
Liability to HMRC (Red arrow)	100K	Liability to HMRC (Red arrow)	300K

Total Liability to HMRC for Seller = 100k Total Liability to...

#10242 - Vat And Commercial Property Notes - Property Law and Practice

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