When you set out to purchase a commercial property for your business development, you probably weren’t rubbing your hands together and thinking “I can’t wait to increase my upfront costs by 20%”. That part might even have come as a nasty surprise.
We’re talking about the VAT bill due on some property purchases. What you’d hope would be a clear-cut issue is rigged with numerous ‘ifs’, ‘ands’, and ‘buts’ that leave even experienced developers wondering how to navigate their options.
Tripping up on a surprise bill
The first of many problems that plague property buyers is that the VAT status of commercial properties isn’t always obvious.
Sellers might be vague, paperwork can be misplaced, and HMRC is characteristically slow and unhelpful on the issue. Meanwhile, you, the buyer, need to close on the deal and push forward with your plans. The last thing you want is to trip up on a surprise bill.
The delays and complications caused by uncertain VAT status on a purchase aren’t just annoying – they can be devastating to the long-term planning of a project. It significantly alters the purchase price, affects your ability to reclaim VAT on other expenses, and puts unwanted pressure on your cash flow.
So why isn’t the VAT status always crystal clear for commercial purchases?
- It depends on many factors, including the use status and age of the building
- The previous owners may (or may not) have opted to tax
- It can be affected by a change (upon sale) of tenancy/use
Sometimes the tax status of a commercial property will be enviably simple – for example, if you’re buying a brand new commercial building (or less than three years old), then 20% VAT is due on the purchase.
Although most older commercial properties are initially exempt from VAT, many landlords will opt to tax the building. This is why you will need to resource the VAT status from the seller’s solicitor, or in the worst-case scenario, open an investigation with HMRC.
Trouble loves company
Once you find out you have to pay VAT on a property, your problems seem to multiply. Beyond initially determining whether VAT is due on the purchase, you’re left to figure out how to pay the upfront bill, whether to opt to tax the building (and the consequences of this), as well as how to structure the buying entity.
If you do have to pay the VAT on the purchase, then you may also need to consider how to fund it and whether you can fast-track your reclaim to solve potential cash flow issues. It’s likely the biggest tax bill you’ll ever pay and, without careful planning, can easily take the wind out of your sails as you try to expand your business.
Although the VAT may well be refundable, dealing with HMRC is no walk in the park either – answering compliance questions, registering and submitting claims, chasing and ultimately, recovery, can all take up to 40 hours per claim (on average.)
There is some good news too though, which is that just because VAT is due on the purchase, that doesn’t mean that it’s the end of the line. You may be able to remove tax on the sale by structuring it as a transfer of going concern or by revoking VAT from the property.
There are also options to consider for paying the upfront bill, one of which is to get an advance on your VAT refund.
And finally – to tax or not to tax?
There’s more to think about besides paying your initial VAT bill. As the new landlord of the property, you’ll need to decide whether to opt to tax the building yourself or not.
When HMRC says the decision is irrevocable, they mean it. This is a decision worth getting right as it has downstream effects, such as your ability to reclaim expenses, and how a taxed building could affect the desirability to future tenants.
Adsum supports property developers with VAT advances and so we’ve put together a guide that covers all the issues in this article (and more).
By the end, you’ll have a better understanding of:
- When VAT is due on the purchase
- The basic requirements to be able to claim VAT back
- Removing the VAT from the property (TOGCs and 1614ds)
- When to have your VAT refunded
- The benefits of using a Special Purchase Vehicle (SPV)
Download your free guide here.