When switching or diversifying from residential to commercial property investment, one of the more significant issues to consider is VAT. As all residential properties are exempt it’s not something that residential owners or agents have needed to think about.
When you buy your first commercial property, there is a possibility you will be presented with the highest VAT bill of your life, if you have not made adequate preparations.
Where acquiring a property that already attracts VAT (i.e. the property has previously ‘been opted to tax’), the normal course of events is to treat it as a ‘transfer of a going concern’. This generally means that to avoid paying the VAT on the purchase price you must exercise the option to tax beforehand.
Thereafter, you must charge VAT on all supplies relating to that property, rent, insurance and service charges if appropriate and of course any onward sale.
Opting to tax enables you to reclaim VAT paid on related costs such as professional fees, general repairs and refurbishment for example. For properties with service charges, the option enables occupiers to recover VAT. A occupier who can recover VAT will be happier and will have more money to pay the rent.
There may also be a Stamp Duty Land Tax charge on the VAT. This can be significant especially if the VAT lifts the property price into a higher tax band.
VAT considerations do not only apply on freehold transactions. The owner of an exempt property can effectively exercise the option at any time and such matters are often not thought about where properties have passed down from one generation to the next.
As a word of caution once the option has been exercised, there is no turning back, so getting good advice is essential. Making the right choice for the long term is not always straightforward and partnering with an agent with experience in the commercial property sector will help take the risk out of the decision.
Contrary to what many believe, the option does not follow the property. As a new purchaser, you will always need to form your own opinion depending on your individual circumstances.
It should also be noted that some businesses in the financial, insurance, health and charitable sectors are outside the scope of VAT and are unable to recover VAT. A decision to charge VAT on the rent etc will therefore be unpopular for those businesses who are occupiers as it will add to 20% (at the time of writing) to the rent.
Rules, documentation and time limits are highly prescriptive. And, with increasing property values and punitive HMRC penalties, VAT mistakes can be very expensive. Getting appropriate professional advice is essential. A specialist commercial property agent will help you through the decision and will also manage VAT returns and submissions on your behalf within their fee.
To discuss more about investing in Commercial Property, take a look at our website or get in contact with Giles Blagden on 0118 955 7082 or email g.blagden@hicksbaker.co.uk.
