VAT Financing for Commercial Property Purchases

VAT on commercial property purchases and transactions is complex. Generally, the sale or lease of commercial property is exempt from VAT, meaning neither a purchaser nor a tenant would typically pay VAT. This exemption includes exchanges of interests, rights over, or licenses to occupy commercial properties. However, there are exceptions, such as properties that are new (less than three years old) or when the vendor or landlord has opted to charge VAT, often in cases of refurbished properties.

Commercial property owners can opt to charge VAT at the standard rate (currently 20%) when selling or leasing their property. This decision, which must be notified to HMRC within 30 days, allows them to recover VAT on related property costs. However, it’s largely irrevocable for 20 years and doesn’t follow the property to the next owner. This choice can impact the marketability of the property, especially to sectors like banks and charities, who might not be able to recover VAT.

The implications for buyers and sellers are significant. For a property exempt from VAT, vendors cannot recover VAT on related costs, impacting their financial calculations. Standard-rated transactions, however, include VAT, affecting buyers’ cash flow. Understanding these dynamics is crucial for effective financial planning and compliance.

All commercial properties are VAT exempt at the point of sale. However, commercial property owners do have the option to tax, which means charging VAT at 20%. New commercial property (defined as property that is less than three years old) is also liable to VAT at the 20% rate. If you do have to pay VAT on the commercial property you’re purchasing, and you’re eligible for a VAT refund, a VAT advance courtesy of Adsum means you’ll receive the money in advance of HMRC’s reimbursement and can use it to cover the cost of the VAT you have to pay on completion of the property purchase.

New commercial properties (less than three years old) attract VAT at the standard rate. Buyers intending to rent out new properties often elect to charge VAT on future rents and sales to recover the VAT incurred during acquisition.

You cannot avoid paying VAT if it is due. However, if the property you want is opted to tax or a new build, you can use intelligent funding solutions to make the VAT payment, such as Adsum’s commercial property tax funding. As we provide you with an advance on your VAT refund from HMRC, your cash flow will not be affected despite the VAT charge.

In cases where a property rental business is sold and the buyer intends to continue the same business, the transaction may qualify as a TOGC. This classification is outside the scope of VAT, offering an attractive option for buyers. However, for TOGC conditions to be met, the buyer must mirror the seller’s VAT position by the date of transfer.

VAT has to be charged on the sale of a commercial property if the option to tax has been made on it. If so, the option to tax is largely irreversible and this is not at the discretion of the seller.